High Dividend Stocks Guide

Why Oil Is Ready to Break Higher Towards $100 Per Barrel

2009-11-18T09:00:00.000-08:00

Why Oil Is Ready to Break Higher Towards $100 Per Barrel

As the chart below shows, oil looks like it is trapped in a $76-$82 range. Don't be fooled by that range, there is solid reason to believe oil could once again get close to $100, a level not seen since September 2008. Why?

Historically, the price of oil vs. gold has been between about 12:1 and 15:1. When the USD is losing value, the ratio tends to be lower (that is, oil goes up relative to gold as oil producers raise dollar-denominated prices to maintain the value of oil), and since 1/2001 has often been 10:1 or lower.

With oil at about $80/bbl and gold at $1146, the ratio is now 14.33. If oil just hits the higher end of its average (12:1) that implies it could go over $95.

Much will depend on the strength of the recovery and of the US dollar. Over the past 2 years the dollar has behaved as a safe haven currency, dropping when there is good economic news, and rising on increased fear. There are2 clear current market trends:

Increasing global economic recovery

Continuing down trend in the USD

If these continue, a lower than average gold/oil ratio is likely and thus (assuming gold does not go below its current $1146 level) and thus even higher price for oil.

WTI Crude Oil Daily Chart

Special thanks to fellow SA contributor Ashraf Laidi (Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets) and friend Munjid Albader for their inspiration & guidance.

Disclosure: The author has no positions in crude oil at this time, but does hold selected energy equities on a long term basis (ERF, PGH, and PVX).

GLOBAL MARKETS OUTLOOK FULL VERSION 11/16-20: Ominous Double Tops on S&P 500, EUR/USD

2009-11-15T03:53:00.000-08:00

Because global asset markets are so tightly integrated, a weekly preview of major forex pairs also demands a look at key international equity markets, which tend to set the overall bullish or bearish tone, as well as key commodities like oil and gold, which provide a means of evaluating currencies independent of currencies themselves.

GLOBAL STOCK MARKETS

As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the S&P 500. Just note how similar most other major international stock or commodity daily charts match that of the S&P 500.

The key points to note about the chart:

• The possible formation of a bearish double-top pattern forming around the 1100 level

• The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

S&P 500 Daily Chart With Volume With 10 Day Moving Average for Volume

04 Nov 15

For perspective on the significance of the 1100 level, we zoom back to a weekly chart of the S&P 500 for the past 5 years. Note how this level has served as minor multi-week support resistance. Thus if the past is any guide, the rally will need to pass the 1100 within the next few weeks or risk losing credibility. If that happens, then risk assets are likely to either consolidate in a horizontal range or stage a long awaited normal pullback. Note that a drop of 100-300 points would be a perfectly normal retracement and markets would still be in a firm overall uptrend.

S&P 500 5 Year Weekly Chart with 10 Week Moving Average for Volume

06 Nov 15

Again, note the declining overall volume of the rally since April, suggesting a lack of believers in this rally. The bright side is that there may be a lot of cash still available to fuel further rally if the recovery becomes more convincing. The downside of this low volume rally is that it suggests they buyers were short term hot money that will be inclined to sell if the recovery falters. That in turn will depend on whether economies can begin to hold up without massive new stimulus, and if they can't, whether governments will be able to continue providing it, and for how much longer.

If one can answer those questions correctly, then they'll know whether to be long or short these markets and virtually every asset traded.

COMMODITIES: ENERGY AND PRECIOUS METALS

Crude Oil

Summary

Earlier in the week, WTI crude oil price did attempt to pierce the 80 resistance. However, both industry-specific fundamentals and macroeconomic data were not strong enough to sustain the breakout. Release of bearish US inventory data and reduced consumer sentiment triggered sharp selloff towards the end of the week.

Analysis

Decline in crude oil price accelerated after the US reported surprising drop in consumer confidence in November. Price plummeted to 75.57, the lowest in a month, before recovery. The benchmark contract closed at 76.35, down -0.8% and -1.4% on daily and weekly basis respectively.

Preliminary reading for the University of Michigan sentiment index fell to 66 in November from 70.6 in October. Although strong GDP growth (revised down to +3.1%) in 3Q09 was good news, the 26-year high unemployment rate continued to hurt consumer confidence. Consumers lacked job security and this diminished their desire to spend and to invest.

For energy-specific data, we received the weekly inventory report from the US Energy Department. Moreover, the 3 oil agencies also published their latest forecasts on global oil demands. In short, the data were still mixed, pointing to long-term recovery with short-term headwinds seemingly inevitable.

Crude inventory rose +1.76 mmb in the week ended November 6 with the Midwest leading the build. Oil inventory in that region surged +2.1 mmb of which 1.4 mmb was from Cushing, Oklahoma. Other regions also showed modest builds with decline only seen in the East Coast. Refinery runs dropped to 79.9%, the lowest in a year although many facilities have resumed operations after maintenance. This was probably driven by abundant fuel stocks.

After making a trough of around -$5 in August, the spread between WTI and Brent crude oil has turned positive again since September. However, WTI's premium to Brent has narrowed recently as driven by increasing stocks at Cushing, Oklahoma, the place where WTI oil is stored.

The biggest disappointed came from gasoline stockpiles which surged +2.56 mmb. Gasoline demand fell -1.9% from a week ago to 8.844M bpd. The reading was also -1.7% below the level a year ago. 4-week average at 8.917M bpd represented declines of -1.1% and -1.5% on weekly and annual basis respectively.

Distillate inventories climbed -0.35 mmb, the first increase in 5 weeks, as demand slipped. Weather in the Northeast was warmer-than-expected in November and this dampened demand for heating oil.

All of the US Energy Department, OPEC and the International Energy Agency revised upward their forecasts of global oil demand for 2009 and 2010. Although the sizes of upgrades were different among these agencies, the common factor was heavy reliance on demand growth from China.

Macroeconomic data in China were broadly encouraging. Expansions in industrial outputs, power generations and retail sales accelerated in October, fueling speculations that the nation's GDP growth can reach +10% the first in more than a year in 4Q09. Moreover, robust industrial activities and electricity usage signaled strong demands for energy and base metals. However, as Chinese Premier Wen Jiabo said, there are still uncertainties for the road to recovery.

Natural Gas

Summary

Gas price slumped to 4.287 as the Energy Department reported +25 bcf (consensus: +20 bcf) rise in gas storage to 3813 bcf in the week ended November 6. Although the level of increase tightened the year-over-year surplus and the surplus as compared to 5-year average, it sent the absolute gas storage to a fresh record high. The benchmark NYMEX contract climbed +0.5% from Thursday but recorded a weekly drop of -4.4%.

We remain bearish on natural gas price as demand is still bottoming while supply continues to stay at record level. Warm weather serves to worsen the already-weak fundamentals and this should result in delay in recovery.

Analysis

According to Baker Hughes, the number of gas rigs dropped 6 units in the week ended November 13. However, it did not help resolving the problem of oversupply. Since mid-July, the US gas rig count has gained +9.5%. Industry data showed that the economic threshold for US shale plays has been declining, suggesting greater production per rig per USD spent. Rising production efficiency has encouraged E&P companies to increase investment budgets. This exacerbates the demand/supply imbalance.

Gold

Summary

Gold continued its journey to uncharted region and reached a fresh high at 1123.4 Thursday before retreat. However, the strong rebound at NY session Friday signaled investment demand for the precious metal remained robust and we expect the long-term uptrend should resume after consolidation.

Analysis

Gold price rebounded strongly in NY session Friday amid renewed weakness in USD. The benchmark contract surged to as high as 1119.7, just a few dollars below the record high, before settling at 1116.7. The Commerce Department reported that the nominal trade balance in goods and services widened to -$36.5B (consensus: -$31.7B) in September from -$30.8B in the previous month. Although both imports and exports increased significantly, growth in imports (+5.8% mom) outpaced that that In exports (+2.9% mom). The wider-than-expected trade deficits weighed on the dollar.

Although RSI (currently at 73) suggests that valuation of gold has been stretched and pullbacks or corrections cannot be ruled out in the coming week, prevailing dollar weakness, low real interest rate environment and strong investment demand should continue to support gold's uptrend towards end 2009.

IMF's gold sales to the Reserve Bank of India still positively affected gold price. India's gold purchase signaled the ongoing shift of central banks and governments as net gold sellers to net gold buyers. Speculations for further central bank buying boosted investment demand.

Real interest rate in the US remains low and this environment is supportive for gold.

Silver

Summary

Comex silver slid to as low as 17.03 before strong rebound Friday. The benchmark contract ended the week flat. Gold-to-silver ratio declined to 60-ish from above 80 at the end of last year. Although current level represents modest increase from 58 in September, it's still above historical average and suggests silver is modestly overvalued. While recent rally in silver has been driven by upsurge in gold, its fundamentals remain weak.

Analysis

On the supply side, key miners reported that silver mine supply increased +7% yoy in 3Q09. On the demand side, China's silver imports fell -23% to 421 metric tons in September while its exports rose more than 4 times to 455 metric tons, suggesting the country has shifted from a net importer to a net exporter of silver. Although industrial activities are expected to improve as global economic recovers, ample silver supply remains the key concern.

FOREX

Overview

The economic calendar heats up with a tremendous amount of data from across the globe and speeches by Fed officials. The major currency pairs are ready for a breakout and there is certainly sufficient catalyst to trigger one. The only question is, will these event risks kill the rally or pave the way for more gains.

THE event to watch this week: does the S&P 500 and EUR/USD form bearish double tops at their respective resistance levels and begin a period of consolidation, normal 10%-20% pullback, or something more severe.

Other Events to Sustain or Kill the March Rally

The most important: the U.S. retail sales report and speech by Fed Chairman Ben Bernanke on Monday.

If October retail sales are very weak or Bernanke talks up the dollar, the rally in equities and high yielding currencies could come to a screeching halt. However we believe that the chances of this happening are low.

--First, it's usually the Treasury Secretary and not the Federal Reserve Chairman that comments on the USD.

--Second, the Fed has been USD dovish.

If anything Bernanke favors a weaker dollar in this low inflation environment. The focus then turns to what he says about the economy and monetary policy. According to the last FOMC statement, there have been no meaningful improvements in the outlook for the U.S. economy since the previous meeting. Asset prices have moved higher but that does not always suggest a stronger outlook for U.S. companies. Recent comments from other Fed officials remain relatively downbeat as growing unemployment caps optimism.

Bernanke's likely tone will be continued caution, to remind us that the recovery is still vulnerable and therefore interest rates need to remain low for a very long and therefore implementing an exit strategy now is inappropriate. If Bernanke maintains this line, then the dollar will continue to be sold to fund carry trade.

--Retail sales may surprise despite the grim labor market

Despite a difficult labor market, both Redbook and the International Council of Shopping Centers (ICSC) reported a sharp rise in retail sales last month while similar results were reported by individual retailers. Good spending numbers would suggest that the economy is moving in the right direction even though the labor market is weak.

Also due this week is inflation, housing and manufacturing sector reports along with the Treasury International Capital flow report. Eight Federal Reserve Presidents are scheduled to speak on a variety of topics while Treasury Secretary Either will be testifying to the Senate Foreign Relations Committee on Tuesday. Don’t forget that President Obama will be in Asia until next Thursday. Watch for any market moving comments, particularly during the Asia-Pacific Economic Cooperation forum (APEC), but we don't expect any dramatic breakthroughs on currency.

USD

Possible S&P 500 Double Top Signaling the Risk Aversion Needed for US Dollar Rally?

Summary

US Dollar Outlook: Bullish if stocks drop, bearish if they don't

- Key Events: Monday-Core Retail Sales, Retail Sales, Tuesday- PPI m/m, TIC Long Term Purchases, Wednesday-Building Permits, Core CPI m/m

- S&P 500 possible double top around 1100 forming?

- IMF pegs the US dollar as the top funding currency for a yield hungry market

- Sharp rise in the trade deficit, drop in consumer confidence contradict the recovery story

- The US dollar to finally reverse course or once again collapse? COT reports reduction in USD shorts.

Analysis

This past week the dollar made its strongest rally in months against the euro, its prime counterpart, but the move faded. Lacking any reason to boost USD demand, the market kept the USD in its eight-month old bearish trend channel. To achieve a sustained reversal, the USD will need either:

• A sustained period of at least consolidation if not reversal in global stocks and other risk assets that drives up demand for safe haven currencies as carry trades unwind. The S&P 500 has twice backed off from the 1100 level. Failure to break through soon could lead to at least a consolidation period if not outright reversal.

• A fundamental improvement in the US economy that brings recovery in the critical jobs, banking, and housing areas, quite possibly in that order, that provides reason for markets to believe USD interest rates will rise sooner than currently expected and thus lift the dollar out of its current status as a prime funding currency for carry trades.

• A selloff in the EUR, because for every 3 Euros bought, a USD is sold, thus any selloff on one automatically helps the other. Since March, this relationship has been a key driver of the EUR's rally.

Events

For the coming week, the most pressing question for any trader is whether either of these drivers of dollar demand will step forward.

The above noted key USD events this week are unlikely to provide either of these reasons for a USD rally.

Therefore, the dollar's prospects for the coming week are likely to move with overall risk appetite through the global financial markets. Looking beyond US economic events, there seem to be few scheduled events or indicators from elsewhere that might alter the current level of fear or greed. In sum, another relatively quiet week of scheduled news releases.

That doesn't rule out the chance of a volatile trading week or trend shift.

When there is a major market-moving event due, the price action leading up to its release is often muted as traders do not want to increase risk. Moreover, if the news doesn’t fall far from forecasts or it otherwise doesn’t play into the larger market themes, then it fails to move markets. Actually, it is those light economic calendar weeks that we see sentiment build momentum and define new trends. The extended nature of the S&P's March rally and thus far firm resistance around 1100 may be all that is needed.

Retail sales will serve as a barometer for consumer spending (accounting for approximately three-quarters of GDP) and the October CPI numbers will reveal whether there is any merit to hawkish concerns through fears of looming inflation.

Given the continued hits to US jobs and wages, it is difficult to see how either will bring prospects for US rate increases and ensuing USD rally any closer.

EUR

Euro Remains Below 1.5050 - Is It a Double Top to Confirm that Forming on the S&P 500?

Summary

Euro Outlook: Neutral-Bullish if USD Continues Down, Bearish if Stocks Consolidate or Fall

- Key Events: Monday-CPI y/y, Thursday- Trichet speaks, Friday German PPI, Trichet speaks

- The German trade surplus expanded to 10.6B in September

- German GDP rose for a second straight quarter in Q3, but exports struggling under high EUR

- Euro-zone GDP figures worse than expected but better than Q2 and do show EZ growing again-Does ECB raise rates or leave them to help smaller nations still in recession?

- Did the EURUSD form a double top? The S&P 500 is forming one around 1100, and this pair strongly correlates to it. If it fully forms, this will be THE event for global markets in general, not just the EUR.

Analysis

The euro ended the past week slightly higher against the US dollar, but down significantly versus the commodity dollars as Credit Suisse Overnight Index Swap (OIS) rates shifted to price in fewer rate increases. Following the European Central Bank’s latest policy decisions, OIS rates eased back to pricing in 83.1 from 98.5 basis points worth of increases over the coming year. From a technical perspective, EURUSD remains in an uptrend, but 1.5050 is meaningful resistance and a failure to break above in the coming weeks may signal a double top for the pair.

Two offsetting events for the euro at the end of the week, as data showed that the Euro-zone’s third quarter recovery wasn’t quite as healthy as expected while there were some hawkish comments by an ECB official. Specifically:

• Euro-zone GDP rose by 0.4 percent from the second quarter, missing the 0.5 % expected increase. Since this was the advanced reading of the index, there was no breakdown available, but the increase was probably from a slight recovery in export demand. However, consumption may have remained weak, because services PMI for the euro-zone did not rise above 50 – signaling an expansion in business activity – until September.

• ECB Executive Board member Jose Manuel Gonzalez-Paramo said that he couldn’t rule out raising rates while some Euro-zone countries are still in recession, and while such a move would be “less fitting” for those countries, the national governments “will have to understand that.”

Events

In the coming week, only one indicator shows major market-moving potential: Euro-zone CPI. The annual rate of inflation growth is projected to rise to -0.1 percent from -0.3 percent. If the data shows that the euro’s appreciation has actually driven down import costs and price pressures more than expected; the currency could pull back because this could further undermine current market expectations for ECB rate increases.

JPY

Yen Likely to Range Trade vs. the US Dollar Given Lack of Market Moving News

Summary

Yen Outlook: Bearish/Neutral

- Key Events: Monday-BoJ Gov. Speaks, Tuesday-Tertiary Industrial Activity, Friday-BoJ Press Conference

- Yen looks increasingly vulnerable with growing risk appetite

- Yen outperforms against British Pound despite its lower yield

- Forex crowds pointed to potential for USDJPY losses

Analysis

Continued S&P 500 rallies made the safe-haven JPY the second-worst performing G10 currency to finish the week’s trade, beating out only the similarly-battered US Dollar. All major world equity indices finished anywhere from 2-3 percent above their weekly open except for the Japanese Nikkei 225—raising serious doubts on investor demand for Japanese financial asset classes, which reflected poorly on the domestic currency. Indeed, the fundamental arguments for Japanese Yen strengths are becoming increasingly scarce—especially through times of healthy financial market risk appetite.

We have long held that financial market risk sentiment and the trajectory of the S&P 500 would be the major determinant of USDJPY price action. Yet the US Dollar has now become the top funding currency for carry trades as it now carries the lowest overnight yield of any major world currency. This significant shift in interest rates has meant that the USDJPY’s correlation to risky assets has fallen considerably from its heights, and it is admittedly unclear whether the USDJPY would decline on S&P 500 tumbles. In fact, the rolling correlation between the US Dollar Index and S&P is very near record-highs—emphasizing the Dollar’s sensitivity to risk sentiment.

The Japanese Yen may struggle to find a bid against the US Dollar as it trades near substantive highs. This unclear US Dollar/Japanese Yen link to risk sentiment may explain low volatility expectations for the currency pair, and it seems traders are pricing in range trading for the often fast-moving USDJPY. This contrasts with the volatility expectations for other major currencies, and theoretically provides a safe haven for range traders and scalpers for the coming week.

GBP

Bullish Pound Forecast Versus Euro Subject to BoE Surprises?

Summary

Pound Outlook: Neutral

- Key Events: Mon.-Rightmove HPI m/m, Tue.- CPI y/y, BoE Inflation Letter, Wed.-MPC Meeting Minutes, Thur.-Retail Sales m/m

- GBP rally stops on Fitch concern on UK sovereign debt rating

- Similar caution from the Bank of England also hurts Pound, more could come from news this week

- Technical support still there for the GBP

Analysis

The British Pound survived a week of unimpressive news to trade a bit higher against the US Dollar, but a busy coming week of economic event risk may pose further challenges for the UK currency in the week ahead. Early prior-week news that Fitch Ratings took a “cautious” view on its outlook for the UK Government Bond’s AAA sovereign rating shook markets and sent the Sterling plunging about 200 bps. The following Bank of England Quarterly Inflation report expressed a similarly cautious outlook for economic growth, and it seemed like the GBP was headed for a break of key support against the US dollar. Yet the GBPUSD held key technical levels through the week’s close. Whether or not the pair can sustain its level will likely depend on events in the days ahead, setting the stage for another eventful week of British Pound price action.

Events

Consumer Price Index figures and mid-week Bank of England monetary policy minutes will be the major highlights in the week ahead, but traders should watch for UK Retail Sales results too.. Inflation and BoE outcomes are likely to cause volatility in UK interest rate expectations and thus the Pound. The currency rallied sharply through the Bank of England’s most recent interest rate announcement as officials boosted Quantitative Easing measures by only half of the expected £ 50 billion.. Traders will want to see the voting for that decision and general commentary on the future of monetary policy, while the previous day’s CPI data will likewise play a large part in determining monetary policy forecasts. Forecasts call for a modest rise in year-over-year inflation rates, and it is admittedly difficult to predict likely reactions to the event. Lofty expectations for later-week Retail Sales numbers, on the other hand, leave room for disappointment.

The Pound has been able to hold major technical and psychological support versus the Euro and US Dollar, but that will likely be tested in the week ahead. According to US CFTC Commitment of Traders data, Non-Commercial traders are still heavily long the EUR/USD and short the GBP/USD—giving us a fairly bearish EUR/GBP bias. Yet positioning has thus far eased considerably from previous extremes, and the British Pound is at clear risk for losses on continued disappointments in domestic fundamental developments. All else remaining equal, we expect the British Pound to break the psychologically significant 0.8900 mark against the Euro, but our forecasts will likely be put to the test in the week ahead.

CHF

SNB Pledge to Maintain Policy Suggests Range Trading Ahead, But Sudden Risk Aversion Might Overwhelm SNB Efforts to Keep the CHF Low

Summary

Swiss Franc Outlook: Neutral

- Key Events: Tuesday-Retail Sales y/y, Thursday-Trade Balance, SNB Chairman Roth Speaks

- Swiss Investor Confidence Weakens in November

- Producer & Import Prices Unexpectedly Contract in October

- Continued Dovish Policy May Leave the CHF Range Bound Barring any Positive Surprises From The Above Events

Analysis

The Swiss Franc ended the week higher against the U.S. Dollar and the Euro, with the USD/CHF continuing to push toward parity as the pair slipped to a low of 1.0034, just 2pips shy of the yearly low at 1.0032. The CHF appears likely to remain range-bound over the following week as investors weigh the outlook for future policy. SNB member Thomas Jordan made the following points:

• Reaffirmed the central bank’s policy stance during a speech earlier this week and said that the board has reached its goals and does not see any reason to shift policy.

• Continued to voice his concern about the marked appreciation in the Swiss franc, stating that “the exchange rate has quite an important impact” on the economy, and went onto say that the central bank’s efforts to stem the rise against the euro were successful.

• That the SNB will look to normalize policy over the medium-term as conditions improve, but noted that the outlook for the global economy remains highly uncertain and pledged to support the economic recovery in the short run.

Similarly dovish, SNB Governor Jean-Pierre Roth expects to see weaker growth following the crisis, and said that the slump in employment remains a concern as growth prospects remain subdued. As policy makers maintain a cautious outlook for the region and vow to prevent a further appreciation in the exchange rate, the franc seems likely to continue to range trading as markets consider the chance of another SNB intervention. Still, the economic calendar for the following week could spark volatility in the Swiss franc cross rates as the Swiss National Bank holds an improved outlook for growth and forecasts GDP to expand at an annual rate of 0.4% in 2010 amid an initial forecast for a 0.4% contraction.

CAD

Canadian Dollar Continues To Move With Oil, Then Stocks, Then Events

Summary

Canadian Dollar Outlook: Bullish Barring Stock Pullback

- Key Events: Monday-Manufacturing Sales m/m, Wed.- Core CPI m/m, Thurs. Leading Indexes m/m

- Is USDCAD bound to strengthen? Much depends on S&P 500, which drives oil

Analysis

The Canadian dollar was one of the strongest major currencies over the past week, but this was mostly the result of broad US dollar weakness rather than commodity prices, as oil continued to consolidate between $77/bbl and $80/bbl. Furthermore, there was no major economic data on hand. However, one significant indicator was released on Friday, when data showed that Canada’s trade deficit narrowed to a three month low in September. The deficit eased to C$927 million from C$1.99 billion in August due to a 3.5 % increase in exports, suggesting that foreign demand may ease some of the nation’s economic woes. As usual, a break in either direction for oil is likely to translate into a similar move for the Canadian dollar versus the US dollar, but the trend remains in favor of CAD strength and/or USD weakness, barring a significant stock pullback.

Events

Overall, upcoming economic reports out of Canada are anticipated to reflect improving conditions.

• Monday, manufacturing sales for the month of September are projected to rise by 1.7 percent following a drop of 2.1 percent in August, but the actual results could prove to be even better given the jump in exports during the same period.

• On Wednesday, the annual rate of Canadian headline CPI growth for October is projected to bounce back up to 0.1 percent from -0.9 percent, while the Bank of Canada’s core measure is projected to rise to 1.7 percent from 1.5 percent. Such results would suggest that higher commodity costs are providing some support for the headline CPI measures, while improving domestic demand has lifted broader prices. The Bank of Canada sees that “overall risks to its inflation projection are tilted slightly to the downside,” but if CPI climbs higher than expected, the Canadian dollar could rally on improved expectations for interest rate increases.

• Finally, on Thursday, international securities transaction may show that foreign demand for Canadian assets waned in September to C$3.0 billion from C$5.082 billion. On the other hand, wholesale sales are estimated to rise 1.0 percent for September, which would bode well for the November 23 release of retail sales as a gauge of domestic demand.

AUD

Australian Dollar Continuing Higher Barring New Risk Aversion

Summary

Australian Dollar Outlook: Bullish

- Key Events: Tues.-Monetary Policy Meeting Minutes, Wed.- Wage Price Index q/q (expected increase may fuel further rate increase expectations, AUD strength)

- Growing Interest Rate Advantage Feeding AUD Carry Trade Demand, AUD to rise with stocks

- Australian economy unexpectedly added 24,500 jobs in October, equaling a six year high, renews rate hike expectations, and AUD rally

- Westpac Consumer Confidence Fell for the first time in six months by 2.5%

- Consumer inflation expectations fall to 3.2% from 3.5% in October

Analysis

The Australian dollar hit another annual high of 0.9368 against the USD as continued risk appetite and unexpected job creation in October fed bullish sentiment. Equity markets continued push higher with the Dow setting a fresh yearly high as traders took comfort in the G-20’s pledge to maintain low interest rates and stimulus programs. However, the RBA isn’t expected to follow the pack as they have already raise rates at their last two policy meetings and markets are currently pricing in an 83% chance that they will continue to tighten at their December meeting. The prospect of higher borrowing costs led to 2.5% drop in consumer confidence, the first in six months. Confidence remains relatively high, but declining optimism could negatively impact domestic consumption which unexpectedly fell 0.2% in September.

The weak demand had raised the prospect that the RBA would take a break from their tightening policy at their December meeting as there are concerns that premature rate hikes could derail the recovery. Additionally, Governor Stevens last week signaled to markets that the strength of the Australian dollar would limit upside inflation risks and give him the scope to slow the pace of future rate increase. But the surprising job growth renewed expectations for an additional 25 bps hike as it confirmed Governor Stevens' statements following November’s meeting that “there have been some early signs of an improvement in labor market conditions. The rate of unemployment is now likely to peak at a considerably lower level than earlier expected.”

Events

The upcoming economic calendar may only add to the likelihood of a rate increase as the wage cost index is forecasted to show a 0.7% rise in the third quarter, adding to inflation concerns. Westpac’s leading index which tracks eight gauges of activity, such as company profits and productivity, to give an indication of how the economy will perform over the next three to nine months is also due for release. If it continues its current trend of improvement then the brighter outlook for growth will add to the case for future tightening. Rising interest rate expectations will continue to be a supporting factor for the Australian dollar which could see the com-dollar eventually look to test its all-time high. However, the RBA will release their minutes from their November meeting which could hint at the prospect of keeping rate steady at their next meeting which could weigh on the Aussie.

Additionally, the AUD could drop fast if risk appetite wanes which could be the case this week with equity markets up against technical resistance levels.

NZD

New Zealand Dollar Fundamentals To Overwhelm Risk Appetite?

Summary

New Zealand Dollar Outlook: Bearish

-Disappointing retail and manufacturing indicators bear out RBNZ Governor Bollards economic concerns

-Is NZDUSD setting up a bearish reversal of its eight month bull run? Watch to see if the S&P 500 rolls over at the forming bearish double top around 1100

Analysis

Even more than other high yield currencies, the NZD may be living on borrowed time, given the S&P's forming bearish double top. If 1100 indeed proves to be the end of the rally, the NZD would likely suffer more than most other currencies. Risk appetite alone lifted this currency from a six-year low, and it is only a matter of time before the aggressive rally collapses under its own weight.

The NZD's high yield and its mere presence among the list of most liquid currencies have made it a place to park idle cash. In fact, under most scenarios (even a revival in the demand for yield); the NZD may actually lead the over-due correction.

While it is possible that the New Zealand dollar could struggle or tumble even if sentiment is steady or rising; it is best to first cover the most direct fundamental scenario: a plunge in risk appetite. Though the S&P 500 and Gold closed their respective weeks at or near new highs for the year; there is growing skepticism among the trading ranks that the drive can hold up for much longer. As we noted in the above section on global stocks indexes, volume for the S&P 500 (and gold too) hit new monthly lows. From a more historical perspective, we haven’t seen a rally from equities of this magnitude in recent history.

We have argued for many months that from technical and fundamental perspective, values have run ahead of the economics that support them. The return of idled investor funds from the harbor of safe haven assets back into the speculative arena has filled in for the lack of reasonable yield income with the thrill of capital gains. However, eventually a balance will be struck where the speculators will be tapped and what remains to be invested will belong to those managers that are cautiously awaiting the return of dividends, yields and other stable rates of return. When the tides turn, the collapse from profit taking will likely be more severe (though perhaps not as deep) as the initial rally.

When carry trades begin to be unwound in masse, those securities with a weak fundamental foundation will see bleed capital the fastest. Therefore, a currency like the Australian dollar may see a retracement but it could well be relatively mild thanks to its ability to avoid recession and the promise of a hawkish rate regime. However, as we've noted repeatedly, the NZD lacks the fundamental strength of the AUD, even though it has risen in tandem with the AUD.

• The NZ economy is still struggling to recover.

• The central bank has vowed to hold its benchmark lending rate at its record low 2.50 percent until late 2010.

Thus any real retreat in risk appetite makes the overbought NZD a clear favorite for shorting, especially against the oversold USD. Meanwhile, we will keep tabs on the economy’s and central bank’s pace. Event risk over the coming week is relatively light but upstream inflation numbers and credit card spending figures will offer a look at two key concerns for the policy authority.

CONCLUSIONS

Watch the S&P 500 carefully to see if a sustained retreat or range trading stage below the bearish double top beginning to form around 1100 causes this to turn into a truly bearish formation. As noted above

The low volume nature of the March rally suggests there is plenty of short term money that is ready to take profits. If that movement develops, we suggest readers do the same and /or go long safety currencies.

If news events surprise to the upside, risk assets could once again hold on and move forward. Betting against the resilience of the market has been an expensive mistake overall since March. That's why we wait for various forms of confirmation of trend shifts before trading them.

RECOMMENDATIONS

Long risk assets when they hit support levels but be ready to close positions and go short if the double top in the S&P 500, EUR/USD, and other charts holds firm and develops into a pullback.

DISCLOSURE: AUTHOR HAS NO POSITIONS IN THE ABOVE INSTRUMENTS

GLOBAL MARKETS OUTLOOK 11/16-20: Ominous Double Tops on S&P 500, EUR/USD

2009-11-15T03:30:00.000-08:00

NB: The following is a highly abridged version for a quick overview. Those seeking details on the assets discussed should refer to the full length version at:

http://fxmarketanalysis.wordpress.com

http://worldmarketsguide.blogspot.com

My instablogs on http://seekingalpha.com/author/cliff-wachtel-cpa

GLOBAL STOCK MARKETS

As always, we begin our weekly preview of global markets with a look at the S&P 500 stock index. International forex and commodity markets tend to move according to stocks, and no single index provides a better single picture of overall market sentiment than the S&P 500. Just note how similar most other major international stock or commodity daily charts match that of the S&P 500.

The key points to note about the chart:

• The possible formation of a bearish double-top pattern forming around the 1100 level

• The relatively low volume on the rallies to this level compared to the much higher volume at the tops and on the pullbacks since the beginning of September until now. The red line on the volume histogram is a 10 day Simple Moving Average of Volume that clarifies how volume is relatively low on the rallies and higher on the pullbacks.

GLOBAL OUTLOOK Cheat Sheet 11/04: Stocks Rally, Gold, Oil Soar

2009-11-04T04:24:00.000-08:00

NB: FOR FULL DETAILS SEE THE FULL VERSION "GLOBAL OUTLOOK" FOR THE DAY

- Stocks: Tuesday: Asia down, Europe, down, US up, Wednesday morning Asia, Europe up

- FX: Higher equities, bias against safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY,

- Main events today: AUD: Building Approvals, Retail Sales, GBP: Halifax HPI, Services PMI, USD: ADP NFP, ISM Non-Mfg PMI, FOMC St., Fed Funds Rate, Crude Oil Inventories, NZD: Employment Change q/q, Unemployment Rate

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday produced small moves except for gold and oil arising from special events (SEE BELOW) News-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE

STOCKS

US: The S&P 500 was able to net a modest gain in Tuesday's trade, albeit once again on a last minute bargain buying on low overall volume, hardly the kind of rally that suggests high upside potential

Asia: Up on thin, cautious bargain hunting trade ahead of key news items over the next 3 days, including major central bank statements and employment figures in the US and elsewhere

Europe: European stock index futures fell on Tuesday, pointing to a weaker start for equities after Swiss lender UBS posted poor quarterly results and UK's Lloyds Banking Group expected pretax loss for 2009.

ASIA- DOWN N225I -2.31% HS -1.76 % SSEC +2.71 FTSTI -0.90% AORD -2.16 %

EUROPE DOWN FTSE -1.18% DAX -1.43% CAC -1.52%

US- UP S&P +0.24% DJIA -0.18% NASDAQ +0.40%

THIS MORNING

N225I +0.42% HS +1.76 % SSEC +0.46 FTSTI +0.78% AORD +1.24 %

FTSE +0.78% DAX +1.07% CAC -1.52%

Oil: Tuesday: Crude oil fell to below $77, then rose following gold's sharp rally to over $79.50, ignoring mixed to lower stocks. Wednesday: -- Oil prices fell slightly to near $79 a barrel Wednesday in Asia despite an unexpected drop in U.S. crude supplies which suggested demand may be picking up. The Energy Information Administration is scheduled to release its supply data later on Wednesday. Although crude normally follows equities, yesterday it decoupled from stocks and followed gold higher "We still feel that a decline toward the $75 area could be forthcoming as this week proceeds," Galena, Illinois-based Ritterbusch and Associates said in a report.

Gold: Showing a rare decoupling from equities, soaring higher as stocks struggled, due to India's central bank's 200 tonne bullion purchase from the IMF stirs speculation that more is coming from other central banks and sovereign wealth funds.

CURRENCIES: Bias risk currencies due to overall rise in stocks. FX trade today will move with how stocks react to the major news events mentioned above. USD losing ground Wednesday against most crosses.

USD: Down against higher yielding currencies as equities post slight rise and both oil and gold rise sharply. Falling Wednesday morning as equities, gold and oil continue rising. Big USD news event day ahead could move it strongly either up or down. We maintain our 1m EURUSD forecast at 1.45.

EUR: - Dropping slightly against the USD Tuesday, rising with stocks gold, and oil against the USD. likely to move today based on the major USD news, because there is no major EUR news. We remain short EURUSD as a trade recommendation as noted above.

JPY - BoJ Governor Shirakawa will speak at an economic forum in Tokyo where we expect he will echo recent comments that the BoJ is committed to maintaining accommodative policies for a while even as the economy recovers. We remain cautious on JPY performance and look for USDJPY to remain choppy around 90 in the near-term.

GBP – Gained on the USD. The very important Services PMI is due this morning, and a surprise in either direction could move the pound. After that it will likely move as a risk asset based on how the cluster of major USD news affects risk sentiment

AUD: While building approvals were slightly better than expected, the critical monthly Retail Sales data was much worse, -0.2% vs. a forecasted +0.5%. If employment figures are also weak, the RBA might consider deferring or decreasing rate increases until recovery looks more solidified. While retail sales and then the subsequent jobs reports will be major factors in the RBA's next decision, expect one more 25bp hike in December. AUD will likely remain closely linked to risk sentiment for the balance of the year.

NZD: Gaining slightly against the safe haven currencies as it moves up with the small gains in equities on Tuesday. Rising Wednesday

CAD: As expected, gaining ground against the USD as oil and stocks rise.

CHF: Following overall risk sentiment, which in equities has been down/mixed, thus the CHF has been in a tight range.

CONCLUSIONS: Proceed w/ caution waiting until trend clarifies before entering new positions as S&P 500 sits at near term support. Bias still towards seeking risk aversion plays, but JPY and USD vs. riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with CRUDE, GOLD, EURUSD, NZDUSD, and AUDUSD

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

GOLD: Continuing to make multi-year highs independent of movements in equities, purely on speculation that other central banks and other large buyers may do the same. Difficult to predict the extent or duration of such a sentiment driven move into new territory. However, if news over the remainder of the week is strongly bearish for equities, it is difficult to see how oil and gold could continue to rise. Inflation would not be seen as a threat, thus undermining further gold advances. Crude inventories remain high, so there is no immediate problem with supplies that might drive oil higher, especially if the recovery picture does not improve.

Crude Oil: Following the speculative rush into gold following India's central bank bullion purchase despite stocks struggling. Next resistance is at $82. The combined price support around $77 has held over the past week. If the series of key news items over the next 3 days does not cause any surprises, then we might expect crude to trade within this $77-82 range. Positive surprises could cause crude to challenge the $82 level, and disappointments, especially in those related to unemployment, and could pressure it towards $77 and below. If the FOMC surprises with a more dovish than expected statement, that would weaken the USD and thus help crude, whereas a more bullish FOMC wording could push the USD up and pressure oil. Watch the S&P and gold to see how news is affecting the markets and crude.

WTI Crude Oil Daily Chart

02 Nov 04

EURUSD: Continues holding just above strong support level of $1.4700 (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 . If gold and oil continue to move up on speculative pressure independent of equities, that movement could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

EURUSD DAILY CHART

02 Nov 03

NZDUSD: THE TRADE FOR THE NEXT 2 DAYS

Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand's economic fundamentals and recovery story was not nearly as compelling as Australia's. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street's last minute rally on below average volume.

Recommendation: No real support until $0.7077, at which level we have a convergence of both a minor price support level from September and the 38.2% Fibonacci retracement. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.

To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.

To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday's packed calendar should provide clarification of the trend until Friday's US NFP comes out.

As noted above, if gold and oil continue to move up independently of moves in equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

NZDUSD Daily Chart

03 Nov 04

OTHER HEADLINES

Fed Likely to keep key interest rate at record low

Oil falls to near $79 despite US crude supply drop- AP

Disney says China approved Shanghai theme park- AP

GM board decides to keep European Opel unit- AP

Auto sales show industry beginning to stabilize- AP

Rising commodities, deal making lift stocks- AP

Sprint laying off part of wholesale division- AP

Oil prices rise as Fed meets on interest rates- AP

Factory orders rise 0.9 percent in September- AP

(Seekingalpha.com)

Gold Is Not in a Bull Market

Cramer Does It Again with CIT Call

Wall Street Breakfast: Must-Know News

How Bloomberg Fabricates U.S. Housing Numbers

Property Values Set to Fall 43% from Current Depressed Levels

Bear Market Rallies and Lessons of History

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 11/04: Stocks Rally, Gold Soars on India CB Purchase

2009-11-04T04:20:00.000-08:00

SUMMARY

- Stocks: Tuesday: Asia down, Europe, down,US up, Wednesday morning Asia, Europe up

- FX: Higher equities, bias against safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY,

- Main events today: AUD: Building Approvals, Retail Sales, GBP: Halifax HPI, Services PMI, USD: ADP NFP, ISM Non-Mfg PMI, FOMC St., Fed Funds Rate, Crude Oil Inventories, NZD: Employment Change q/q, Unemployment Rate

- Big Theme: Falling risk appetite – normal retest or the next leg down back to November or March support? See Conclusions below for trading opportunities as many assets approach or breaching key levels. Light news Tuesday produced small moves except for gold and oil arising from special events (SEE BELOW) News-packed Wednesday. TRADERS SHOULD HAVE TRADING PLANS READY FOR MOVES IN EITHER DIRECTION, MARKET REACTION TO NEWS WEDNESDAY-FRIDAY TO DECIDE

STOCKS

The S&P 500 was able to net a modest gain in Tuesday's trade, albeit once again on a last minute bargain buying on low overall volume, hardly the kind of rally that suggests high upside potential

Stocks had started the session in negative territory as the U.S. dollar gained ground against a basket of major foreign currencies and drove the Dollar Index up almost 0.8% to a near one-month high. In the face of broader market weakness and a stronger greenback, materials stocks (+1.2%) were able to make strong gains as gold prices raced higher.

Gold shook free from its correlation to the greenback by trading higher for the entire session. It settled with a 2.9% gain at $1084.90 per ounce, but that was after it hit a new record high of $1087.30 per ounce. Gold's record high came about as the dollar handed back a large chunk of its gains, such that the Dollar Index closed with a near 0.2% gain.

The greenback's pullback also brought some buyers back into the broader equity market. Buyers showed favor for industrial stocks, which finished 1.4% higher, better than any other major sector. Among industrial plays, railroad stocks (+12.0%) garnered particular interest, thanks to a cash and stock offer of $100 per share for Burlington Northern Santa Fe (BNI 97.00, +20.93) from Warren Buffett's Berkshire Hathaway (BRK.A 100,450.00, +1,700). Despite that vote of confidence, stocks still lacked leadership.

Financials, a frequent leader for the broader market, traded erratically before settling with a 0.4% gain. Insurers (+4.4%) proved helpful in the advance, offsetting weakness in MasterCard (MA 219.20, -3.45), which posted better-than-expected third quarter earnings, but reaffirmed that it wouldn't hit its long-term revenue growth target due to recent macro weakness.

In other corporate news, Dow component Johnson & Johnson (JNJ 58.93, -0.56) reaffirmed an in-line earnings outlook for fiscal 2009, but also said it will eliminate 6% to 7% of its global workforce as it works to strengthen its position.

Factory orders for September were the only piece of data on the economic calendar. Orders increased a stronger-than-expected 0.9%, but that didn't have an impact on trade.

Economic data will be in sharper focus tomorrow, though. The ADP Employment Report for October is due, along with the ISM Services Index for October. The FOMC also issues its latest policy statement.

Advancing Sectors: Industrials (+1.4%), Materials (+1.2%), Energy (+1.1%), Financials (+0.4%), Consumer Discretionary (+0.3%)

Declining Sectors: Consumer Staples (-0.7%), Telecom (-0.5%), Tech (-0.3%), Utilities (-0.2%), Health Care (-0.1%)DJ30 -17.53 NASDAQ +8.12 NQ100 +0.4% R2K +1.5% SP400 +1.2% SP500 +2.53 NASDAQ Adv/Vol/Dec 1611/2.18 bln/1070 NYSE Adv/Vol/Dec 1841/1.38 bln/1185

Asia: Up on thin, cautious bargain hunting trade ahead of key news items over the next 3 days, including major central bank statements and employment figures in the US and elsewhere

Europe: European stock index futures fell on Tuesday, pointing to a weaker start for equities after Swiss lender UBS posted poor quarterly results and UK's Lloyds Banking Group expected pretax loss for 2009.

GLOBAL

MARKETS FRIDAY

ASIA- DOWN N225I -2.31% HS -1.76 % SSEC +2.71 FTSTI -0.90% AORD -2.16 %

EUROPE DOWN FTSE -1.18% DAX -1.43% CAC -1.52%

US- UP S&P +0.24% DJIA -0.18% NASDAQ +0.40%

THIS MORNING

ASIA CLOSING UP

N225I +0.42% HS +1.76 % SSEC +0.46 FTSTI +0.78% AORD +1.24 %

EUROPE: OPEN UP

FTSE +0.78% DAX +1.07% CAC -1.52%

COMMODITIES: Up Tuesday despite mixed stocks as India's central bank's gold purchase from the IMF

Oil: Tuesday: Crude oil fell to below $77, then rose following gold's sharp rally to over $79.50, ignoring mixed to lower stocks. Wednesday: SINGAPORE (AP) -- Oil prices fell slightly to near $79 a barrel Wednesday in Asia despite an unexpected drop in U.S. crude supplies which suggested demand may be picking up. The Energy Information Administration is scheduled to release its supply data later on Wednesday.

Although crude normally follows equities, yesterday it decoupled from stocks and followed gold higher.

"We still feel that a decline toward the $75 area could be forthcoming as this week proceeds," Galena, Illinois-based Ritterbusch and Associates said in a report.

Gold: Showing a rare decoupling from equities, soaring higher as stocks struggled, due to India's central bank's 200 tonne bullion purchase from the IMF stirs speculation that more is coming from other central banks and sovereign wealth funds.

CURRENCIES: Bias to safe-haven currencies due to overall downtrend in stocks. FX trade today will move with how stocks react to the major news events mentioned above

USD: Down against higher yielding currencies, but continuing recent gains against the EUR, JPY

The dollar weakened during the US session as equities recovered from a slow start and gold set an all-time high. US equities finished slightly positive on the day as a major US investor announced a large transportation M&A transaction. Meanwhile gold pushed as high as $1087.80 before coming back to $1084.35 at the time of writing. While better data has raised the potential of a shift in the Fed's communication, a still soft labour market and subdued inflation will likely keep the FOMC in check. FOMC officials will probably want to see some more sustained improvement before making a material shift. We could see some more discussion on the Fed's ability to shrink the balance sheet and manage exit strategies. Non-manufacturing ISM is also due ahead. Asset markets are likely to remain choppy as more investors look to lock in profits heading into year-end, which would benefit the dollar and as such, we maintain our 1m EURUSD forecast at 1.45.

EUR: - Dropping slightly against the USD, likely to move today based on the major USD news, because there is no major EUR news.

More PMI releases ahead Several ECB officials spoke but did not offer any new comments ahead of the ECB meeting. Weber said he is optimistic about a successful exit from current policies though he did caution that we are not fully recovered yet. The EU Commission revised up its GDP growth forecasts for 2010 to +0.7% y/y from -0.1% y/y previously, both for the Eurozone and the wider EU. The Eurozone GDP forecast for the current year was unchanged at -4.0% y/y. Additionally, it predicted that the Eurozone emerged from recession in Q3, with 0.5% q/q growth. Meanwhile EU Monetary Affairs Commissioner Almunia said that EURUSD is expected to average at 1.48 in 2010 and 2011 Final Eurozone and German PMIs for October are due. We remain short EURUSD as a trade recommendation.

JPY - BoJ Governor Shirakawa will speak at an economic forum in Tokyo where we expect he will echo recent comments that the BoJ is committed to maintaining accommodative policies for a while even as the economy recovers. We remain cautious on JPY performance and look for USDJPY to remain choppy around 90 in the near-term.

GBP – Gained on the USD. The very important Services PMI is due this morning, and a surprise in either direction could move the pound. After that it will likely move as a risk asset based on how the cluster of major USD news affects risk sentiment

Services PMI due The construction PMI for October not only failed to meet consensus expectations but, coming in at 46.2, also declined for a second consecutive month (cons. 47.2, prev. 46.7). The reading is in stark contrast to the much stronger Manufacturing PMI which rose to 53.7 for October. But the upcoming services PMI will be of more interest to the BoE's MPC. A positive print could potentially signal a less than consensus expansion of the QE program. We are more constructive on sterling in the longer-term but still think policy uncertainty could still weigh in the nearterm, and we look for EURGBP at 0.94 in 1m.

AUD: While building approvals were slightly better than expected, the critical monthly Retail Sales data was much worse, -0.2% vs. a forecasted +0.5%. If employment figures are also weak, the RBA might consider deferring or decreasing rate increases until recovery looks more solidified. While retail sales and then the subsequent jobs reports will be major factors in the RBA's next decision, expect one more 25bp hike in December. AUD will likely remain closely linked to risk sentiment for the balance of the year.

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.

CAD: As expected, gaining ground against the USD as oil and stocks rise.

CHF: Following overall risk sentiment, which in equities has been down/mixed, thus the CHF has been in a tight range.

CONCLUSIONS: Proceed w/ caution waiting until trend clarifies before entering new positions as S&P 500 sits at near term support. Bias still towards seeking risk aversion plays, but JPY and USD vs. riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with CRUDE, GOLD, EURUSD, NZDUSD, AUDUSD

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

GOLD: Continuing to make multi-year highs independent of movements in equities, purely on speculation that other central banks and other large buyers may do the same. Difficult to predict the extent or duration of such a sentiment driven move into new territory. However, if news over the remainder of the week is strongly bearish for equities, it is difficult to see how oil and gold could continue to rise. Inflation would not be seen as a threat, thus undermining further gold advances. Crude inventories remain high, so there is no immediate problem with supplies that might drive oil higher, especially if the recovery picture does not improve.

Crude Oil: Following the speculative rush into gold following India's central bank bullion purchase despite stocks struggling. Next resistance is at $82. The combined price support around $77 has held over the past week. If the series of key news items over the next 3 days does not cause any surprises, then we might expect crude to trade within this $77-82 range. Positive surprises could cause crude to challenge the $82 level, and disappointments, especially in those related to unemployment, could pressure it towards $77 and below. If the FOMC surprises with a more dovish than expected statement, that would weaken the USD and thus help crude, whereas a more bullish FOMC wording could push the USD up and pressure oil. Watch the S&P and gold to see how news is affecting the markets and crude.

WTI Crude Oil Daily Chart

02 Nov 04

EURUSD: Continues holding just above strong support level of $1.4700 (50 day MA + 23.6% Fibonacci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 . If gold and oil continue to move up on speculative pressure independent of equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

EURUSD DAILY CHART

02 Nov 03

NZDUSD: THE TRADE FOR THE NEXT 2 DAYS

Background: Arguably one of the most overbought pairs because it moved up with the AUDUSD even though New Zealand's economic fundamentals and recovery story was not nearly as compelling as Australia's. Thus when the current pullback began, it was very vulnerable and came in hard and broke strong support near the $0.7250, where both its 50 day MA AND 23.6% Fibonacci retracement converged. Currently sitting on multiday support around 0.7160, it is currently falling (despite positive Labor Cost index q/q data this morning) and testing this level as Asian stocks pull back, apparently unimpressed by Wall Street's last minute rally on below average volume.

Recommendation: No real support until $0.7077, at which level converges both a minor price support level from September and the 38.2% Fibonacci retracement. No major NZD or USD news Tuesday, so this will move with overall market sentiment, which is currently down in Asia. However Wednesday is packed with top events in both the US and NZ (see Summary-Key Events at the top) to virtually guarantee volatility.

To play the further drop, entry near current levels as shown on the chart below while sufficient profit potential remains before the $0.7077.

To play the upside, wait until stocks start climbing on some substantially positive news that could sustain a multi-day bounce, and the pair breaks above $0.7160. Wednesday's packed calendar should provide clarification of the trend until Friday's US NFP comes out.

As noted above, if gold and oil continue to move up independently of moves in equities, that could pressure the USD and drive this pair higher. Similarly, if gold and oil drop back the USD should strengthen and pressure the pair lower, though much depends on what equities are doing at the time.

NB: See a daily chart of the AUDUSD, and note the similarity. Those seeking to trade this pair could apply the above mentioned indicators and comments.

NZDUSD Daily Chart

03 Nov 04

OTHER HEADLINES

Fed Likely to keep key interest rate at record low

Oil falls to near $79 despite US crude supply drop- AP

Disney says China approved Shanghai theme park- AP

GM board decides to keep European Opel unit- AP

Auto sales show industry beginning to stabilize- AP

Rising commodities, dealmaking lift stocks- AP

Sprint laying off part of wholesale division- AP

Oil prices rise as Fed meets on interest rates- AP

Factory orders rise 0.9 percent in September- AP

(Seekingalpha.com)

Gold Is Not in a Bull Market

Cramer Does It Again with CIT Call

Wall Street Breakfast: Must-Know News

How Bloomberg Fabricates U.S. Housing Numbers

Property Values Set to Fall 43% from Current Depressed Levels

Bear Market Rallies and Lessons of History

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK CHEAT SHEET 11/02: TIRED RALLY TO HOLD OR PULL BACK? PACKED NEWS WEEK WILL DECIDE

2009-11-02T07:18:00.000-08:00

Stocks: Friday: Asia up, Europe, US down Monday morning Asia down, Europe opened down, mixed on no-news reaction bounce

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY, GBP, small reversal early Monday

- Main events today: GBP: Mfg PMI, USD: ISM Mfg PMI, Pending Home Sales, NZD: Labor Cost Index q/q

- Big Theme: Falling risk appetite indicating tired rally? In addition to earnings, Friday's retreat after Thursday's rally on US GDP data shows markets not convinced the GDP growth is sustainable but rather a product of temporary US Government stimulus, see Conclusions below for trading opportunities as many assets approach or breaching key levels.

STOCKS

US: The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March. Personal spending, durable goods, and Chicago PMI employment component all disappointed last week. This week is packed w/ major news events that should set near term direction. See Full Version & Weekly 4 more

Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.

Europe: European shares hit a four-week low on Monday, extending the previous session's sharp declines on fears that the stocks had rallied ahead of the recovery, with banks featuring among top losers. In early morning trade stocks are attempting to rally with many making small gains on no news, thus this feels more like a reaction bounce at the time of this writing.

ASIA- UP N225I +1.4% HS +2.29 % SSEC +1.20 FTSTI -0.10% AORD +1.57 %

EUROPE DOWN FTSE -1.81% DAX -3.09% CAC -2.86 %

US- DOWN S&P -2.81% DJIA --2.51% NASDAQ -2.50%

THIS MORNING N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %

FTSE +0.16% DAX -0.41% CAC +0.24%

COMMODITIES: Down Friday with stocks as the dollar gained.

Oil: (AP) -3.61% Friday on the swing back to negative sentiment. Prices rose above $77 a barrel Monday in Asia, recovering some ground after a big fall, as investors eyed upcoming figures on the U.S. economy and a volatile dollar. The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.

Gold: Down 0.64% in Friday US trade

CURRENCIES: Bias to safety currencies with falling stocks. See Weekly Outlook Full Version for details on all for the coming week.

USD: Volatile Week Ahead: Rose last week against virtually all majors except the JPY,GBP. Losing ground in early Monday trade in a minor retracement. Its fate this week will depend on the packed calendar of potentially market moving events. The main ones are Monday's ISM manufacturing (expected to progress further into the 50+ expansionary levels), Wednesday's FOMC statement, ISM Non-Manufacturing index (its employment component is significant for Friday's reports), the ADP Non Farms Payrolls report, and Friday's climactic US Non Farms Labor and employment rate reports.

EUR: - RETAIL SALES AND UNEMPLOYMENT ADD TO EURO’S PLIGHT-The EUR/USD fell Friday, negating most of Thursday's gains. The world-wide stock market selloff, including the sharpest decline in European stocks in four months, has led to renewed interest in the safety of the dollar at the expense of the euro. Disappointing German retail sales for the second straight month and rising unemployment data, declining CPI and hints of ECB intervention this past week also weighed on the EUR. Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657)

JPY - USD/JPY: BOJ BEGINS GRADUAL PULLOUT FROM CREDIT MARKETS The Bank of Japan initiated a gradual retreat from unconventional measures, triggering a massive rally in the Yen against all other major counterparts. The central bank plans to let its temporary program to acquire corporate bonds and commercial paper to expire at the end of December as initially planned. The overnight interest rates remained intact at 10 basis points. Economic signs have started to point toward stabilization as the economy emerges from its deepest recession in more than half a century.

GBP – GBP/USD: GOOD DATA NO DEFENSE FOR POUND’S Like most other currencies, excluding the dollar and yen, the pound dropped with risk appetite. The notion that economic growth has been overstated in recent months has sent Britain’s stock markets spiraling, facing their worst week in six months. Friday's set of economic releases pointed toward a slightly more optimistic outlook for the troubled economy, but these were overwhelmed by negative market sentiment, a common phenomenon.

AUD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of 0.9000 support Sunday and early Monday.

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.

CAD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to regain some lost ground but struggling against falling oil prices, which are the primary CAD price driver.

CHF: Lost ground against the USD last week, attempting a minor rebound early Monday, gained against EUR despite SNB intervention, which may not help if risk aversion over the past week develops into a full blown multi-week pullback.

CONCLUSIONS: Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE SEE DAILY, WEEKLY FOR MORE.Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil: Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

WTI Crude Oil Daily Chart

03 Nov 02

EURUSD: Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .

EURUSD DAILY CHART

01 Nov 02

OTHER HEADLINES

Yankees Move Within One Win of 27th World Series Title After Game 4 Rally Postive Sentiment

(Bloomberg)

CIT's Bankruptcy May Help Bondholders, Erase Taxpayer, Shareholder Stakes

•Asian Stocks Fall on Declines in Commodity Prices, U.S. Consumer Spending

•Aussie Dollar Channeling Yuan Shows Increased Trading in China Asset Proxy

•CapitaMalls, Longfor to Test Demand for Asian Property With Initial Offers

•Pandit's `Near Death' Cash Hoard Signals Lower Profits Ahead at U.S. Banks

•U.K. Bonus Rules Come Into Effect, Mean Less Cash, More Shares for Bankers

•Manufacturing in U.S. Probably Grew by Most Since 2006, Driving Expansion

Chinese Manufacturing Expands at Fastest Pace in 18 Months, Surveys Show

•Australia Says Economy to Grow Faster Than Expected, Keeps Deficit Outlook

(Seekingalpha.com)

Global Markets in Review: Reversal in Financial Markets

What's the Fail Value for the Dow Jones Industrial Average?

Airlines: Some Costs They Can't - And Shouldn't - Cut

Q4 Outlook: Real Life Stress Tests Begin

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 11/02: TIRED RALLY TO HOLD GAINS OR PULL BACK? PACKED NEWS WEEK WILL DECIDE

2009-11-02T07:16:00.000-08:00

SUMMARY

- Stocks: Friday: Asia up, Europe, US down Monday morning Asia down, Europe opened down, mixed on no-news reaction bounce

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against all majors except for JPY, GBP, small reversal early Monday

- Main events today: GBP: Mfg PMI, USD: ISM Mfg PMI, Pending Home Sales, NZD: Labor Cost Index q/q

- Big Theme: Falling risk appetite indicating tired rally? In addition to earnings, Friday's retreat after Thursday's rally on US GDP data shows markets not convinced the GDP growth is sustainable but rather a product of temporary US Government stimulus, see Conclusions below for trading opportunities as many assets approach or breaching key levels.

STOCKS

The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March.

Wrote Peter Schiff of EuroPac Capital: Upside GDP Surprise: Misleading

Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending.

Third quarter 'growth' was largely driven by a 23% increase in residential construction (the largest quarterly increase since 1986) and a 3.1% increase in consumer spending, which included a 22% jump in durable goods purchases – mostly automobiles – and 2.3% gain in government spending. Since the increase in consumption outpaced the increase in production, the trade deficit expanded, reversing the positive trend for most of 2008 and 2009. Because the increase in spending outpaced the increase in incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.

Stocks have also reached a number of milestones: The Dow has fallen the most since April, gains in the month of October have been completely reversed, and the S&P has seen its first monthly decline since April. Things have definitely taken a different tone, but the ultimate direction that the market decides to pursue heavily depends on some key events for next week.

Noted Kathy Lien of fx360.com

Thursday's surprising GDP report may have indicated that a more substantial recovery is underway, but a series of economic indicators from today showed that consumers will not be leading the rise. The idea that a consumer led recovery may not be the case this time around is very troubling because it is unclear if there is any another sector that would be able to recharge growth like the consumers have in the past.

• Personal Spending was today’s first sign of concern, dropping for the first time in five months by 0.5%.

• To add insult to injury, wages and salaries declined and the savings rate rose, adding to the indication that consumers have their wallets sealed tight.

• Likewise, spending on durable goods took a nosedive by 7.2%, giving added evidence to the theory that government assistance has been the main driver that turned up spending in the third quarter.

• Ironically, another sign that trouble is ahead was produced by a report that blew away expectations. Chicago Purchasing Managers’ reported a significant rise to the highest level in more than a year. However, the optimism that the headline number exuded was quickly forgotten because the employment component actually fell last month. As a harbinger for next week’s employment report, the PMI wound up reinforcing the idea that continued job losses will substantially curtail expenditures now that some forms of government support have been eliminated.

The preceding factors, accompanied by substantial market swings and volatility, have already started to weight down confidence. The University of Michigan’s Consumer Sentiment Index fell off of yearly highs to reach 70.6. It seems that the market has a right to be worried that growth is composed of artificial factors rather than a dynamic rebirth of activity. That is not to say that we are not on the road to recovery, it’s just that there may be a few extra bumps along the way than many expected.

Actually, the bigger question is how big those bumps will be and have risk asset prices discounted these?

Investors will also be paying attention to third quarter corporate earnings results this week. Ford Motor Co., Cisco Systems Inc., Kraft Foods Inc., Marathon Oil Corp., Starbucks Corp. and Time Warner Inc. are scheduled to report.

Asia: Asian stock markets fell Monday after grim news about American consumers sowed more doubts about the U.S. economic recovery and sent Wall Street tumbling last week.

Europe: European shares hit a four-week low on Monday, extending the previous session's sharp declines on fears that the stocks had rallied ahead of the recovery, with banks featuring among top losers. In early morning trade stocks are attempting to rally with many making small gains on no news, thus this feels more like a reaction bounce at the time of this writing.

GLOBAL

MARKETS FRIDAY

ASIA- UP N225I +1.4% HS +2.29 % SSEC +1.20 FTSTI -0.10% AORD +1.57 %

EUROPE DOWN FTSE -1.81% DAX -3.09% CAC -2.86 %

US- DOWN S&P -2.81% DJIA --2.51% NASDAQ -2.50%

THIS MORNING

ASIA DOWN

N225I -2.31% HS +1.71 % SSEC -0.61 FTSTI -0.45% AORD -2.16 %

EUROPE: MIXED

FTSE +0.16% DAX -0.41% CAC +0.24%

COMMODITIES: Down Friday with stocks as the dollar gained.

Oil: (AP) -3.61% Friday on the swing back to negative sentiment. Prices rose above $77 a barrel Monday in Asia, recovering some ground after a big fall, as investors eyed upcoming figures on the U.S. economy and a volatile dollar. The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.

Gold: Down 0.64% in Friday US trade,

CURRENCIES: Bias to safety currencies with falling stocks. See Weekly Outlook Full Version for details on all for the coming week.

USD: Volatile Week Ahead: Rose last week against virtually all majors except the JPY and, strangely, the GBP. Losing ground in early Monday trade in a minor retracement. Its fate this week will depend on the packed calendar of potentially market moving events. The main ones are Monday's ISM manufacturing (expected to progress further into the 50+ expansionary levels), Wednesday's FOMC statement, ISM Non-Manufacturing index (its employment component is significant for Friday's reports), the ADP Non Farms Payrolls report, and Friday's climactic US Non Farms Labor and employment rate reports.

Now that the market has reached an inflection point where uncertainty has replaced confidence, the employment report will be key in providing markets direction for the coming month. That is just the schedule for the US. When accounting for the fact that the RBA, BoE, and ECB will all be announcing rates, it becomes clear how pivotal next week will be in ironing out some loose ends of the current economic landscape.

EUR: - RETAIL SALES AND UNEMPLOYMENT ADD TO EURO’S PLIGHT-The EUR/USD fell Friday, negating most of Thursday's gains. The world-wide stock market selloff, including the sharpest decline in European stocks in four months, has led to renewed interest in the safety of the dollar at the expense of the euro. Disappointing German retail sales for the second straight month and rising unemployment data, declining CPI and hints of ECB intervention this past week also weighed on the EUR. Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657)

Details: For the most part, several high profile economic indicators foreshadowed troubles ahead for the sixteen country region. The first disappointment was that German Retail Sales fell for the second time in a row, adding to the realization that the recovery will not be assisted by the consumer. Even though German government initiatives have focused on keeping people at work, employers were forced to cut working hours in order to prevent such layoffs. The result is obviously a cut in income, and likewise reduced spending. To add on to consumer difficulties across the Euro-zone, the unemployment rate rose to 9.7% which is the highest rate on record. Since last September, the report indicated that a total of 3.2 million jobs have been lost in spite of government support. An estimate on Consumer Prices showed a slight uptick to -0.1% from -0.3%, hardly the rise that would signal increased interest by the ECB. Speaking of the ECB, the central bank has become a lot more vocal about their distaste over the euro’s persistent strength. Comments from the ECB’s Christian Noyer have surfaced and indicated that “problems are stemming from the weakening of the dollar and the pound.” However, it is still unclear what the central bank will be willing to do to prevent a continued rise. This week’s big event will be the ECB’s rate decision which is scheduled for Thursday.

JPY - USD/JPY: BOJ BEGINS GRADUAL PULLOUT FROM CREDIT MARKETS The Bank of Japan initiated a gradual retreat from unconventional measures, triggering a massive rally in the Yen against all other major counterparts. The central bank plans to let its temporary program to acquire corporate bonds and commercial paper to expire at the end of December as initially planned. The overnight interest rates remained intact at 10 basis points. Economic signs have started to point toward stabilization as the economy emerges from its deepest recession in more than half a century.

The Jobless Rate unexpectedly fell to 5.3% from 5.6% in September and job-to-application ratio rose for the first time in more than two years. Meanwhile, Household Spending continued its positive trajectory rising for second consecutive month. An increase in domestic demand has been a welcome sign for Japan’s newly elected government which continues its push for a more consumer driven economy. However it’s not all sunshine and butterflies for current stage of economic recovery. The Bank of Japan forecasted deflation to persist into 2011 in its half-year economic outlook report. Core CPI dropped to -2.3% in September, remaining in a negative territory for seventh month in a row. On another note, Annualized Housing Starts came in line with predictions as construction sector is bottoming out.

GBP – GBP/USD: GOOD DATA NO DEFENSE FOR POUND’S Like most other currencies, excluding the dollar and yen, the pound dropped with risk appetite. The notion that economic growth has been overstated in recent months has sent Britain’s stock markets spiraling, facing their worst week in six months.

Overwhelmed as they usually are by overall sentiment, Friday's set of economic releases pointed toward a slightly more optimistic outlook for the troubled economy. Nationwide’s House Price Index posted its first yearly advance in more than a year and a half. Furthermore, the report showed that prices have been consistently rising for the past six months. Nationwide noted that historically low interest rates have mitigated some of the effects of a disastrous employment market. However, it is doubtful that this trend is sustainable without a rebound in the job market. GFK Consumer Confidence was also reported today and showed a slight advance from -16 to -13, its highest level in ten months. Former BoE policy maker Charles Goodhart said in an interview that he believes “quantitative easing will be reduced in scale.” Plenty of comments lately, too much of which have contradicted each other to provide a reliable explanation of what the BoE plans to do. This brings us to the bank’s meeting on Thursday which may actually render a discernible change to the bank’s quantitative easing policies. Otherwise, we will have Manufacturing PMI and Industrial Production to keep things busy for next week.

AUD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of 0.9000 support Sunday and early Monday.

NZD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to come back as it rises off of $0.7170 support Sunday and early Monday.

CAD: Lost ground against the safe haven currencies last week like all the commodity and high yielding risk currencies. Attempting to regain some lost ground but struggling against falling oil prices, which are the primary CAD price driver.

Details: USD/CAD: GDP DROPS UNEXPECTEDLY Yesterday’s minor rally in the commodity dollars seems like nothing more than a fluke, as the greenback continued to rally against the Australian, New Zealand, and Canadian Dollars. The Canadian economy unexpectedly shrank in August by 0.1%, suggesting that recovery remains in a “fragile” stage. Finance Minister Jim Flaherty cautioned that economic stimulus packages were crucial to the recovery’s success and need to be continued. However, Flaherty noted that “we are seeing some stability of late, which is to be desired, and so we're all comfortable.” A rapid rise in the Canadian Dollar undoubtedly dampened a drastic turnaround in growth. However, the loonies’ recent selloff does offer some solace to policy makers. Meanwhile, Australia’s Bank Lending unexpectedly dropped for the first time in nine month during September. Weaker demand for business credit enhanced declines as entrepreneurs and companies temporarily reduced their borrowing. Next week, the Reserve Bank of Australia is expected to increase their target rate by additional 25 basis points even though recent inflation reports have been disappointing. Building Permits in New Zealand rose for the fifth time in the last half-year which is pointing to a recovery in the housing market. The country has their employment report on tap for the middle of next week.

CHF: Lost ground against the USD last week, attempting a minor rebound early Monday, gained against EUR despite SNB intervention, which may not help if risk aversion over the past week develops into a full blown multi-week pullback.

CONCLUSIONS: Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets.. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil breaches key $74 resistance, implying more upside unless stocks pull back on earnings disappointments. Always use sell stop orders.

Crude Oil: Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

Global Markets Outlook Nov 2-6: Pullback or Reversal? This Week Decides

2009-11-02T07:09:00.000-08:00

GLOBAL EQUITIES MARKETS

The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March. The S&P currently sits at multi-week support around 1040.

Peter Schiff of Europac Capital wrote:

Even the giddiest commentators admit that the upside GDP surprise resulted almost entirely from government interventions. But, by pushing up public and private debt, expanding government, deepening trade deficits, and pushing down savings rates, these interventions have succeeded only in putting our economy back on an unsustainable path of borrowing and spending. Accordingly, they have prevented the rebalancing necessary for long-term health. Could there be a simpler illustration of trading long-term pain for short-term gain?

During the decade that corresponds to the Great Depression, annual GNP expanded for six years and contracted for four. After nose-diving in the early years of the decade, GNP turned positive in 1934 and then logged three more years of solid growth (the four year average annual growth rate was 8.5%).

But does anyone really believe the Great Depression ended in 1934, when the economy first stopped contracting? Unemployment reached 19% in 1938, nearly the peak of the entire Depression, almost a full decade after the stock market crashed! Why will we be so much luckier this time around?

The unpopular truth is that rather than curing the economy, government stimulus has made it sicker. The Bush Administration and the Greenspan Fed pursued this policy recipe in the 2002-2003 recession. The result was four years of phony growth, greater global imbalances, and the development of unsupportable asset bubbles. Clearly we have learned nothing from those mistakes.

Third quarter 'growth' was largely driven by a 23% increase in residential construction (the largest quarterly increase since 1986) and a 3.1% increase in consumer spending, which included a 22% jump in durable goods purchases – mostly automobiles – and 2.3% gain in government spending. Since the increase in consumption outpaced the increase in production, the trade deficit expanded, reversing the positive trend for most of 2008 and 2009. Because the increase in spending outpaced the increase in incomes, the savings rate plunged from 4.9% in the prior quarter to 3.3%.

The sizzling numbers for housing and autos resulted from heady cocktail of policy stimulants: near-zero interest rates, government-guaranteed mortgages, Federal Reserve purchases of mortgaged-backed securities, tax credits for homebuyers, bailouts for auto finance companies and 'cash for clunkers' for car buyers.

Noted Kathy Lien of fx360.com

Thursday's surprising GDP report may have indicated that a more substantial recovery is underway, but a series of economic indicators from today showed that consumers will not be leading the rise. The idea that a consumer led recovery may not be the case this time around is very troubling because it is unclear if there is any another sector that would be able to recharge growth like the consumers have in the past.

Personal Spending was today’s first sign of concern, dropping for the first time in five months by 0.5%.

To add insult to injury, wages and salaries declined and the savings rate rose, adding to the indication that consumers have their wallets sealed tight.

Likewise, spending on durable goods took a nosedive by 7.2%, giving added evidence to the theory that government assistance has been the main driver that turned up spending in the third quarter.

Ironically, another sign that trouble is ahead was produced by a report that blew away expectations. Chicago Purchasing Managers’ reported a significant rise to the highest level in more than a year. However, the optimism that the headline number exuded was quickly forgotten because the employment component actually fell last month. As a harbinger for next week’s employment report, the PMI wound up reinforcing the idea that continued job losses will substantially curtail expenditures now that some forms of government support have been eliminated.

The preceding factors, accompanied by substantial market swings and volatility, have already started to weight down confidence. The University of Michigan’s Consumer Sentiment Index fell off of yearly highs to reach 70.6. It seems that the market has a right to be worried that growth is composed of artificial factors rather than a dynamic rebirth of activity. That is not to say that we are not on the road to recovery, it’s just that there may be a few extra bumps along the way than many expected.

Actually, the bigger question is how big those bumps will be and have risk asset prices discounted these?

Major events for this week

The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.

Outside of the US, major events include policy statements from the ECB, BoE, and RBA, which is expected to raise the cash target rate by 25 bps again.

While the overall picture from Q3 earnings(healing but mostly still hurting and not hiring) is already old news, investors will also be paying attention to third quarter corporate earnings results this week from some of the remaining marquee names. Ford Motor Co., Cisco Systems Inc., Kraft Foods Inc., Marathon Oil Corp., Starbucks Corp. and Time Warner Inc. are scheduled to report.

While equities tend to drive currency markets, there are times when currency markets can move both equities and commodities. Much depends on the context of overall sentiment. In the past month we have seen the same kind of currency news affect the markets in opposite ways, due to the prevailing mood when the news came out. When Australia announced that it was raising interest rates, markets were already in rally mode and moved higher still on the news, citing this first rate increase among the major economies as further proof of ongoing global recovery.

Yet just this past week, Norway became the first European country to raise rates. The markets should have been thrilled. After all, Australia is part of the higher growth Asian block, and has the fastest growing economies as primary trading partners. Norway, however, has to manage in a tougher, slower growth neighborhood, Europe. That the Norges Bank would have enough confidence to raise rates could have been seen as even more bullish.

However, markets were already in retreat mode due to justifiable concerns that stocks and other risk assets were already overpriced. Thus when the news about Norway's rate increase came out, the media cited it as one of the reasons for continuing market pullback. Why? Because perhaps the rate increase was premature and would cut off the nascent recovery!

OIL & GOLD

Fell along with stocks. -3.61% Friday on the swing back to negative sentiment. Prices rose above $77 a barrel Monday in Asia, recovering some ground after a big fall, as investors eyed upcoming figures on the U.S. economy and a volatile dollar. The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy. Oil gave up much of its gains this past week falling from around $81 to $77 per barrel, and fell 3.61% on Friday alone. Gold fell from around $1060 to$1040, and fell just 0.61% on Friday. Barring any surprises, they are expected to continue to follow sentiment as represented in equities, particularly the S&P 500.

MAJOR CURRENCIES

A packed news week ahead, as is always the case with weeks ending in the month's climactic US Non Farms Payroll and employment rate reports. Employment lies at the very heart of the US recovery, given its central role in fueling consumer spending (70% of US GDP), and in turn driving consumers' ability to repay debt and revive housing and the banking sectors. These are the very industries that have lead the world's market collapses and rallies over the past years, thus the credibility of the recovery story depends greatly on US employment, which is still not showing steady improvement.

USD

Key Events Likely to to Favor Risk Aversion, and thus the Safe Haven US Dollar

Summary

Outlook for US Dollar: Bullish

- Main Events, ISM Mfg index, Non-Mfg index, Fed policy st., ADP NFP, US DoL NFP & Employment Rate, other central bank policy statements also could influence the USD

- US Dollar rallies on S&P 500 losses-more of the same likely if the coming reports disappoint

- Forex Options and Futures point to US Dollar bottom as excessive USD shorting unwinds

- USD volatility likely on ADP NFP, Non Manufacturing PMI, Fed rate decisions and US NFP

Analysis

The US Dollar finally showed signs of life through the past week of trading, moving higher against the Euro and other key forex counterparts. The US S&P 500 and other financial risk sentiment barometers continued their move down that they began the prior week, spurring the dollar turnaround. Given extreme bearish sentiment on the USD, it wasn't surprising to see it continue mostly higher through Friday’s close. We have long argued that the Greenback was way oversold and thus likely move sharply higher on any pullback in stocks and other risk assets. While it's dangerous to take early positions betting on major counter-trend moves before these moves are clearly established, the substantial week-long turnaround gives us reason to believe that the US Dollar may have finally set a major low and will likely continue higher through end-of-year trading.

Events

A packed economic event docket means high potential for USD volatility. Because the dollar is a direct participant in at least 70% of all fx trade, that means significant potential volatility in forex this week. Forex options market volatility expectations are at their highest since early July ahead of highly-anticipated central bank decisions and the US Nonfarm Payrolls report. Recent US Q3 GDP figures suggest that the world’s largest economy is in better shape than previously thought, and consensus forecasts are for relatively steady improvements across key economic indicators. However bullish expectations leave plenty of room for disappointment, and the recent spike in the S&P 500 Volatility Index (VIX) suggests traders will dump risky assets at the first sign of trouble. No surprise there, given the widespread belief that markets have already priced in the growth and are overbought.

Early-week ISM Manufacturing and Pending Home Sales could move markets across classes, but the real action will probably start with Wednesday's triple-feature of results for the:

• ADP NFP

• ISM Non-Manufacturing

• US Federal Open Market Committee Rate Decision

Because most US jobs are not in manufacturing, the ISM Non-Manufacturing Employment Index will likely set the mood ahead of Friday’s climactic Nonfarm Payrolls result. The sub-index has shown reasonably steady improvements after setting record-lows through 2008, but the below-50 reading shows that employment will likely continue to contract through the near future. Surprises in either direction will likely set the tone for the afternoon’s FOMC decision, while Friday’s NFPs concludes this week of heavy economic event risk.

Given the eventful week ahead combined with continued questions about whether risk asset markets are overbought, the coming week could be another wild ride across USD pairs. Given our belief that markets are due for a pullback that should spark demand for the safe haven USD as fear rises and dollar shorts unwind, we suspect the dollar is due for further gains in the short term, though only in the short term, because its underlying fundamentals have not improved.

Alt EVENTS FR FX 360

To start off, on Monday we will receive the ISM Manufacturing report which is expected to make further progress into the +50 expansionary levels. On Wednesday, the FOMC will provide the markets with some clarifications on current initiatives. Now that the deadline for Treasury purchases has approached, the Fed will have to determine what their next step will be in the Quantitative easing unwinding process. Wednesday will also produce the ISM Non-Manufacturing index which will have grave implications for Friday’s Non-Farm payrolls report. Now that the market has reached an inflection point where uncertainty has replaced confidence, the employment report will be key in providing markets direction for the coming month. That is just the schedule for the US. When accounting for the fact that the RBA, BoE, and ECB will all be announcing rates, it becomes clear how pivotal next week will be in ironing out some loose ends of the current economic landscape.

EUR

Risk Aversion, Possible USD Recovery Threatens Euro Uptrend

Summary

Forecast for Euro: Bearish

- Main Event: ECB Policy St. , Minimum Bid Rate, see also all the USD events above, as EUR moves opposite the USD

- German unemployment unexpectedly lower, but Merkel warns about optimism

- Monthly Flash consumer inflation index reports 5th straight negative print

- EURUSD trend retracing but has yet to reverse

Analysis

The US dollar and euro account for the highest and second highest level of reserves in the world’s central banks, thus the EURUSD is the world's most liquid fx pair, accounting for about a third of all trading. Thus when one of these moves in one direction, the other tends to move in the opposite direction, because for every three EUR bought, a dollar is sold and vice versa. The dollar has been the top reserve currency, and in turn been used to value commodities and benchmark currencies for decades; but the academic, political and speculative communities have been abuzz for months about how the greenback is slowly losing its primacy. The euro is the next choice to serve as the financial medium for international investors and consumers. If it happens at all, such a profound shift would take at least a decade, likely longer. However, this relationship is linking the EUR and USD, leaving the dollar’s strength and weakness to guide the broader trends of the euro.

While the euro has only a small yield advantage of many of the majors and is anchored in the relatively solid German and French economies which account for about half of Euro-zone GDP, the euro's anti-dollar role has made it behave like a risk currency, moving opposite the USD's direction for good or bad.

Thus euro traders always have to watch the dollar carefully. There are plenty events to watch as well. The myriad of rate decision (primarily the RBA, but also the Fed and ECB) as well as Friday’s US labor figures offer tangible catalysts to prepare for.

While risk appetite is always important to monitor whatever one is trading, the euro may still find volatility through its own event risk, especially Thursday’s ECB rate decision. The market and economists are unanimous in their forecasts for rates to be held unchanged at 1.00 percent; but there is potential for the statement and President Jean Claude Trichet’s commentary to fuel speculation for the eventual, hawkish turn.

This past week, ECB member Axel Weber stirred this pot when he suggested that it was time to start withdrawing stimulus from the markets. And, just to confirm his bias, he went on to say that policy officials will not wait for employment to pick up to hike rates as by then it may already be too late. In contrast, a draft of the EU’s recent summit reveals officials’ belief that it is too early to start pulling back support for the recovery, though they did not repeat the 2011 timeframe that was suggested before. Euro traders should also be wary of the BoE’s policy announcement (due the same day and nearly the same time) as an expected change to the MPC’s bond purchasing program could spark interest rate speculation throughout the majors.

JPY

Yen Consolidating Following Major Rally?

Summary

Outlook for Japanese Yen: Bullish

- Events: Average Cash Earnings y/y, BoJ Gov. speaks & policy st.,

- Retail sales top forecasts for September, up 0.9% from August

- BoJ left rates at 0.10%, and will allow liquidity program to conclude in December

- Does the recent drop in carry trades indicate a broader reversal?

Analysis

Playing its traditional role as chief safe haven currency in the context of a market pullback, they JPY was easily the strongest of the majors over the past week, rallying nearly 7 percent against the New Zealand dollar and over 4 percent versus the euro, Australian dollar, and Canadian dollar. There was also a 2% drop in USDJPY. Clearly

• risk aversion has made a big comeback

• The Japanese yen has maintained its top “safe haven” status, followed by the USD

Indeed, the CBOE’s VIX volatility index, one of the prime “market fear” gauges, rose above 30 for the first time since July, which may indicate that the shift in sentiment may extend into the weeks ahead.

That said, the moves we saw in the Japanese yen crosses were extreme, which suggests some caution at the start of this coming week, as the majors could see a bit of a consolidation period. At the same time, event risk for currencies like the Australian dollar, US dollar, euro, and British pound will be very high ahead of related central bank rate decisions, which could move markets if they produce any surprises.

Events

Japanese-specific news will be quite limited, and we expect the JPY to move with market risk sentiment. First, the minutes from the Bank of Japan’s latest policy meeting, no surprises expected. Next, Japan’s leading economic indicator is projected to rise to, which would mark a one-year high as well as the sixth month of improvement. Likewise, the coincident index is forecasted to rise to a 10-month high of 92.5, all of which would reaffirm the BOJ’s more optimism.

GBP

BoE Decision: QE or Not QE? That is the Question

Summary

GBP Outlook: Neutral

- Events: Mfg PMI, Halifax HPI, Services PMI, Asset Purchase Facility, MPC Rate St., BoE Official Bank Rate, PPI Input

- Risk sentiment will outweigh GBP events, though these may contribute to overall sentiment

- Consumer confidence up to a 21-month high, purchasing plans to 23-month high, but both are still net negative

- GBPUSD a rare pair struggling with a range rather than potential trend reversal

Analysis

Though they are linked, economic health and interest rate policy pose two very unique concerns for sterling traders. The extension of the nation’s record-breaking recession a few weeks ago has devalued the currency’s standing amongst peers that are already in more advanced stages of recovery. In turn, this raises questions about interest rate timing and monetary policy. The Bank of England (BoE) meets this coming Thursday and the outcome - whether it result in looser, tighter or no change to policy - will almost certainly influence trends volatility. Will any moves last long enough to break prominent ranges (GBPUSD) and perhaps reestablish the pound’s standing in the constant ebb and flow of risk trends?

Over the past month, we have seen a number of dramatic swings in the pound; and nearly every one of them has been tied to interest rate speculation. On Friday October 23, GBPUSD plummeted after disappointing GDP data showed that the UK contracted for a sixth consecutive quarter – extending the worst recession on records going back to 1955. This specific release has been central to speculation about the BoE decision. There will be no change to the benchmark lending rate; but there is high debated disagreement on what will happen with the quantitative easing program.

A few weeks ago, a central bank economist stated his belief that the group will likely pause its purchases. In fact, former MPC member Goodhart projected the same thing despite the dismal outcome of the economic update. However, markets are highly skeptical. Economists are calling for a 50 billion pound extension to 225 billion, though both the very existence as well as size of the extension is unclear. Because the current target for gilt purchases was already reached this past Thursday, the central bank will have to make a decision to pause or increase the target.

After the surprise expansion of the economy’s painful recession through September, there is now less concern over whether the pound can remain competitive in the slow, global return of interest rates and more worry that the UK won’t be able to make a significant push into positive growth before the world-wide recovery levels off.

Events

Forecasts for general growth and its major components will be of primary concern; but inflation projections should be noted. Aside from the central banks outlook, there are a number of economic releases on deck to watch for potential volatility explosions. Indicators for housing, consumer confidence, manufacturing, services and construction health will provide a well-round and timely update on activity.

Overall risk sentiment outweighs events

And, though pound traders have a lot of notable event risk to keep track of next week; it should not be forgotten that the underlying current is still investor sentiment. Should the BoE’s asset purchase target be altered, the impact on the pound will be filtered through the progression of risk appetite. Stationed at the extreme of the risk spectrum, this currency moves like a risk currency because its financial markets and economy stand to benefit the most through the global advance of growth and investment.

CHF

Swiss Franc Likely to See Major Breakout Versus Euro If Risk Aversion Persists

Summary

Outlook for Swiss Franc: Neutral

- Swiss KOF rises to its highest in 17 months

- Swiss Franc Futures and Options positioning nonetheless points to CHF losses

The Swiss Franc finished the week modestly higher against the Euro in open defiance to clear Swiss National Bank FX intervention threats. The Euro/Swiss Franc exchange rate hit the sensitive SFr 1.5080 mark and very quickly reversed—raising clear suspicion of SNB selling. Indeed, the EURCHF hit its lowest levels in nearly a month following a much better-than-expected Swiss KOF Leading Indicator report. Yet the declines were temporary, and the SNB seemingly drew yet another “line in the sand” to prevent excessive Swiss Franc appreciation. Holding with its policy, the Swiss central bank neglected to comment despite the telltale signs of intervention.

No surprise that the intervention failed; the EURCHF finished just above pre-intervention levels through the end-of-week close. Sharp drops in global equity markets led traders to sell the risk-sensitive Euro and buy the safe-haven Swiss franc—leaving questions as to whether EURCHF intervention may be effective. That will clearly depend on how scary things get. We question whether the SNB will succeed if the reversal becomes a stampede out of risk assets.

Events

The countervailing forces of Swiss National Bank intervention and financial market flights to safety should make for another eventful week of Swiss Franc trading. A busy week of economic event risk likewise promises no shortage of excitement, and FX Options markets are pricing in the most EURCHF volatility in nearly a month. The major highlight will likely be Thursday’s Swiss Consumer Price Index report. Given the SNB’s resolve to prevent CHF appreciation in the face of deflationary pressures, any strong surprises in either direction could force considerable price movements. Pressure remains on the SNB to stave off deflation, but a considerably above-forecast print would almost certainly ease said pressure. Traders will otherwise look to Friday’s combination of Swiss and US Employment numbersGiven the increasingly narrow week-to-week ranges in the EURCHF, one gets the sense that the pair is preparing to make a substantial break in either direction.

CAD

Driving the CAD: Oil First, Risk Appetite Second, Employment Data Third

Summary

Outlook for Canadian Dollar: Bearish

- GDP Disappoints, Contracts by 0.1% in August

- Crude Prices Continue To Dominate CAD direction

Analysis

The Canadian dollar fell to its lowest level in nearly a month against the USD as broader risk aversion sank oil prices and weak growth figures helped erase early October gains. Canadian GDP unexpectedly fell in August by 0.1% disappointing economists who were looking for growth of 0.1%. Oil and gas extraction and, to a lesser extent, manufacturing were the main sources of the decline. The Canadian economy is expected to feed off of the global recovery and government stimulus. Therefore, the surprise contraction will weigh on the outlook for future growth but the lagging indicator’s relevance could diminish if upcoming reports continue to point toward a sustainable recovery.

However, what may be of more concern for currency traders are the central bank’s continued talk of intervention. The verbal efforts may not be driving current weakness but could limit bullish sentiment going forward.

Bank of Canada Governor Carney repeated this week that policy makers have “options” to slow the “loonie’s” appreciation, if its strength makes hitting their inflation target of 2.0% prohibitive. Market participants shouldn’t expect any action over the near-term as the Governor would go on to say that "history has shown intervention in and of itself without backing policy moves...seldom is effective over the longer term." The central bank leader recommitted to keep the bank’s key interest rate at 0.25% through June 2010, unless inflation threatens their 2% target. Policy makers would point to greenback weakness as the culprit for the local dollar’s strength and continues to view the current trend as a negative for the Canadian economy. The U.S. is Canada’s main trading partner and demand for exports will continue to be impacted as the exchange rates make Canadian goods more expensive for US customers.

Events

This week’s economic calendar offers new event risk and insights into the Canadian economy. Just like the past week we will have to wait till the end of the period with the Ivey PMI on Thursday and the employment report on Friday. Manufacturing activity is forecasted to have slowed to 59.5 from 51.7 but remain in expansion territory for a fifth straight month. Meanwhile, economists are forecasting that the Canadian economy added another 10,000 jobs in October following the unexpected gain of 30,600 the month prior. The surprise job growth sparked a “loonie” rally that sent the USD/CAD to a fresh yearly low of 1.0205. Continued job creation may spark bullish sentiment for the CAD, helping erase recent losses. However, traders must also consider the U.S. NFP report in determining price direction. The USD/CAD found trend line resistance around 1.0835which could set the pair up for a reversal to start the week. However, a break above the level exposes potential to 1.1100-9/2 high.

AUD

Rate Hikes Priced In, AUD Will Trade With Market Optimism

Summary

Outlook for Australian Dollar: Bearish

- Australian Lending Unexpectedly Falls, Threatens Recovery

- New Home Sales Decline for First Time Since May, Says HIA

- Inflation Hits Decade Low in Q3, But Rate Hikes Still Expected Given Prior RBA Remarks

- Business Confidence to Highest Level in 15 Years Per NAB

- Producer Prices Drop Most on Record on Currency Gains

The Australian Dollar may find little lasting support after the central bank delivers another interest rate increase as risk aversion undermines demand for the high-yielding currency and the rate hikes are largely priced in given the recent bullish comments that virtually promised more rate increases.

Traders clearly took Stevens at his word: a Credit Suisse gauge of priced-in rate hike expectations has steadily shown that investors are fully convinced that another 25 basis points will be tacked on to borrowing costs on November 2nd and probably in the months to come as well. In fact, expectations of an increase have been unwavering even as the annual inflation rate declined to the lowest in a decade and producer prices fell at the fastest pace on record, hinting that little upward pressure in the pipeline. To that effect, the risks to the Australian Dollar seem stacked on the downside considering there is little that the RBA’s hawks can say at this point that has not been priced into the exchange rate, with the announcement having significant market-moving potential only in the unlikely event that policymakers backtrack on their aggressive posture.

Even if they go ahead with rate increases and there is not major pullback in stocks, one can't rule out an AUD pullback. Why? Just this past week, when Norway became the first Euro-zone country to raise rates analysts widely viewed it negatively, as a threat to the nascent recovery! This after Australia's rate increase was seen as recovery evidence and sparked rallies mere weeks ago.

As we've noted elsewhere, this opposite reaction to such similar news suggests that risk appetite has been sated for now and markets are viewing news as an excuse to take profits.

AUD Events- Who Cares?

Looking beyond the rate decision, the trend in risk sentiment is likely be the dominant catalyst for price action, rendering local news almost irrelevant.

After two consecutive quarters of a breakneck bullish momentum across the spectrum of risky assets (stocks, commodities, high-yielding currencies), investors seem to have turned sheepish: the MSCI World Stock Index declined for the first time since June, registering the biggest loss in eight months in October; meanwhile, the VIX index of US stock options volatility that is often seen as a proxy for investors’ risk aversion jumped 23.9% on Friday, the largest one-day spike in a year.

If this proves to signal a substantial shift away from risky assets, the Australian Dollar will face tremendous selling pressure. Indeed, a trade-weighted index of the antipodean currency’s average value against top counterparts is now 91.8% correlated with the aforementioned MSCI global stock benchmark.

NZD

Drop Likely as Risk Appetite, Employment, Wage Growth Sputter

Summary

Fundamental Forecast for New Zealand Dollar: Bearish

- RBNZ Holds Benchmark Interest Rate Steady

- Business Confidence Lower in October

- Trade Deficit Narrows as Imports Tumble

The NZD fell 3.75% against the dollar this week as investors reduced expectations for higher interest rates, and the currency may continue to face increased selling pressures in November as the economic docket is expected to reinforce fears of a protracted recovery. The Reserve Bank of New Zealand held the benchmark interest rate at 2.50% this week and pledged to maintain borrowing costs at the record-low throughout the first-half of the following year in order to foster a sustainable recovery, and noted is wasn't worried about inflation as much as "subdued" business spending.

Moreover, the RBNZ said that the Kiwi's rise “has limited the scope” for an export-led recovery, and sees the current account deficit widening over the medium-term as global trade conditions remain far from favorable. As a result, Credit Suisse overnight index swaps shows investors see a 2% chance for a rate hike in December, and uncertainties surrounding the economic recovery may continue to weigh on interest rate expectations as policy makers anticipate growth and inflation to remain subdued going into 2010.

Further, Prime Minister John Key argued that New Zealand dollar is “a little bit overvalued” and said that he would “prefer a lower exchange rate” to help support the recovery, but went onto say that “it is very difficult” for the government to temper the appreciation following the weakness in the global reserve currency. In addition, Mr. Key saw a risk for the government budget to stay in deficit “for a decade” after marking the first short-fall in nine-years, and the cautious outlook held by policy makers may continue to drag on the New Zealand dollar as investors weigh the prospects for a sustainable recovery.

Events

The economic docket for the following week is expected to reinforce a weakened outlook for household spending as economists forecast employment to fall 0.3% in the third quarter, with the jobless rate anticipated to reach a nine-year high of 6.4% from 6.0% in the three-months through June, while private wages are projected to rise 0.3% during the same period, which would be the lowest level of growth since 2000.

Thus the NZD/USD may continue to test the 50-Day SMA at 0.7170 for near-term support and if global markets continue down the kiwi-dollar may test the 100-Day SMA at 0.6846, as investors unwind NZD longs. However, a rise in risk appetite may lead the pair to retrace the sharp decline over the following week and could test the 10-Day SMA (0.7448) for resistance.

CONCLUSIONS

Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets. Thus:

be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY.

Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite.

Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.

TRADING OPPORTUNITIES

Crude Oil

Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

WTI Crude Oil Daily Chart

03 Nov 02

EURUSD

Holding just above strong support level of $4.4720 (50 day MA + 23.6% Fiboncci retracement from its June rally, also lower BB band around 1.4657). Look to play a break above this if there is bullish news to at least 1.4845, the high of the past few days, or if more bad news or drops in global equities, a break below to at least the lower Bollinger Band at around 1.4653, next support at around 1.4600, a convergence of past price support AND just above the 38.2% Fibonacci retracement from the June rally at 1.4565 .

EURUSD DAILY CHART

01 Nov 02

Global Markets Outlook Nov 2-6: Short Version--Pullback? Reversal? This Week Decides

2009-11-02T07:06:00.000-08:00

The following is meant to be a brief overview only. See the full length version for more on all the below at www.avafx.com/analysis and scroll down to the contents table for weekly analysis

GLOBAL EQUITIES

The S&P 500 fell about 4% this week, a fairly representative figure for the major indexes. Thursday's better than expected US GDP brought a temporary knee jerk reaction bounce. However, the markets concluded that the GDP result was mostly from unsustainable government stimulus programs rather than genuine private sector growth. Friday's 2.8% drop wiped out that gain and then some, marking the steepest one-day selloff since July 2. It also meant that the index fell 2 per cent in October, marking the first monthly decline since the stock market began to rebound in early March. The S&P currently sits at multi-week support around 1040.

Major Events

The Labor Department's October employment report will likely be the most closely watched report, but data on manufacturing, services and home sales could also move markets. The Federal Reserve will also comment after a two-day meeting on interest rate policy.

Outside of the US, major events include policy statements from the ECB, BoE, and RBA, which is expected to raise the cash target rate by 25 bps again.

OIL & GOLD

Fell along with stocks. Barring any surprises, they are expected to continue to follow sentiment as represented in equities, particularly the S&P 500. See

MAJOR CURRENCIES

A packed news week ahead, much of it impacting employment, the foundation of a US and world recovery.

USD

Key Events Likely to to Favor Risk Aversion, and thus the Safe Haven US Dollar

Summary

Outlook for US Dollar: Bullish As Falling Risk Assets Boosts Safe Haven USD

- Main Events, ISM Mfg index, Non-Mfg index, Fed policy st., ADP NFP, US DoL NFP & Employment Rate, other central bank policy statements also could influence the USD

- US Dollar rallies on S&P 500 losses-more of the same likely if the coming reports disappoint

- Forex Options and Futures point to US Dollar bottom as excessive USD shorting unwinds

- USD volatility likely on ADP NFP, Non Manufacturing PMI, Fed rate decisions and US NFP

Given the eventful week ahead combined with continued questions about whether risk asset markets are overbought, the coming week could be another wild ride across USD pairs. Given our belief that markets are due for a pullback that should spark demand for the safe haven USD as fear rises and dollar shorts unwind, we suspect the dollar is due for further gains in the short term, though only in the short term, because its underlying fundamentals have not improved.

EUR

Risk Aversion, Possible USD Recovery Threatens Euro Uptrend

Summary

Forecast for Euro: Bearish As Sentiment, Trends, Events Favor Safer Currencies Like the USD

- Main Event: ECB Policy St. , Minimum Bid Rate, see also all the USD events above, as EUR moves opposite the USD

- German unemployment unexpectedly lower, but Merkel warns about optimism

- Monthly Flash consumer inflation index reports 5th straight negative print

- EURUSD trend retracing but has yet to reverse, if USD gets stronger EUR should weaken

JPY

Yen Consolidating Following Major Rally?

Summary

Outlook for Japanese Yen: Bullish For Same Reasons As the USD—Rising Risk Aversion Favors Safe Haven Currencies

- Events: Average Cash Earnings y/y, BoJ Gov. speaks & policy st.,

- Retail sales top forecasts for September, up 0.9% from August

- BoJ left rates at 0.10%, and will allow liquidity program to conclude in December

- Does the recent drop in carry trades indicate a broader reversal?

GBP

BoE Decision: QE or Not QE? That is the Question

Summary

GBP Outlook: Neutral

- Events: Mfg PMI, Halifax HPI, Services PMI, Asset Purchase Facility, MPC Rate St., BoE Official Bank Rate, PPI Input

- Risk sentiment will outweigh GBP events, though these may contribute to overall sentiment

- Consumer confidence up to a 21-month high, purchasing plans to 23-month high, but both are still net negative

- GBPUSD a rare pair struggling with a range rather than potential trend reversal

CHF

Swiss Franc Likely to See Major Breakout Versus Euro If Risk Aversion Persists

Summary

Outlook for Swiss Franc: Neutral

- Swiss KOF rises to its highest in 17 months

- Swiss Franc Futures and Options positioning nonetheless points to CHF losses

- SNB intervention may not help if risk asset pullback becomes full trend reversal

CAD

Driving the CAD: Oil First, Risk Appetite Second, Employment Data Third

Summary

Outlook for Canadian Dollar: Bearish Along With Our Outlook for Risk Assets

- GDP Disappoints, Contracts by 0.1% in August

- Crude Prices Continue To Dominate CAD direction

- BoC intervention threats not taken seriously at this time

AUD

Rate Hikes Priced In, AUD Will Trade With Market Optimism

Summary

Outlook for Australian Dollar: Bearish Along With All Risk Assets Until Markets Stabilize

- Australian Lending Unexpectedly Falls, Threatens Recovery

- New Home Sales Decline for First Time Since May, Says HIA

- Inflation Hits Decade Low in Q3, But Rate Hikes Still Expected Given Prior RBA Remarks

- Business Confidence to Highest Level in 15 Years Per NAB

- Producer Prices Drop Most on Record on Currency Gains

- Likely to Continue Following Risk Sentiment Up and Down – Short term is likely flat to down

NZD

Drop Likely as Risk Appetite, Employment, Wage Growth Sputter

Summary

Fundamental Forecast for New Zealand Dollar: Bearish for Same Reasons as for the AUD

- RBNZ Holds Benchmark Interest Rate Steady

- Business Confidence Lower in October

- Trade Deficit Narrows as Imports Tumble

CONCLUSIONS

Seeking risk aversion plays. JPY and USD vs riskier currencies when these breach resistance or support., short oil gold when breach support. See below for specific opportunities with the EURUSD, CRUDE

Trading Opportunities: Near term favors SAFE HAVEN currencies, shorting risk assets. Thus:

be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY.

Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite.

Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Always use sell stop orders.

TRADING OPPORTUNITIES

Crude Oil

Broke support at the first Fibonacci retracement level at $77.83 last week, holding on near its 20 day MA. When/if risk appetite returns, next resistance is at last week's high and round price level of $80/bbl. If risk assets like stocks continue to drop, next support level is at the significant 38.2%/61.8% Fibonacci retracement level at $75.51, which is near the multi-month price support of around $74/bbl.

EURUSD DAILY CHART

01 Nov 02

Stocks vs Currencies: Which Moves Which? Must Know Basics

2009-11-02T07:00:00.000-08:00

In the Short Term, Equities Generally Drive the USD and Other Currencies , Not Vice Versa

Here's an important point to clarify. Over the past week, there seems to be a common notion in the media (check out Yahoo Finance's weekly recap- I believe from briefing.com) that a rising USD was driving stocks lower. We disagree strongly, and suggest that such analysts were simply casting about for an explanation other than the one supported by far more evidence-that the current rally is overbought and due for at least a correction if not reversal.

In fact, most of the time the opposite is true- in the short term stocks drive the USD (and currency trade in general). While currency trends can and do affect equity markets, that influence tends to be more gradual, whereas stock market movements tend to have immediate impact on currency markets. Much of the reason for this is that 80% of currency trading is speculative, mostly very short term. Equities tend to be held for longer periods.

When Stock Markets Are Optimistic, Currency Traders Sell Dollars

Why? Global stocks, arguably best represented by the S&P 500, are widely believed to be the best barometer of optimism about growth prospects, aka risk appetite, or pessimism, aka risk aversion.

When there is risk appetite, traders buy currencies that tend to rise when there is growth (for a variety of reasons, but mostly because these offer the highest short term yields). These are referred to as risk currencies, the main ones being the AUD, NZD, EUR, and CAD).

When Stocks Markets Retreat, Currency Traders Buy Dollars (also JPY and CHF)

When there is fear or risk aversion, the risk currencies are sold and traders buy currencies that tend to rise in times of fear. This group is known as the safe-haven currencies. The USD has, over the past few years, generally been the #2 most in-demand safe haven currency, after the #1 JPY, though in some ways it's becoming the #1 safe haven currency.

These Labels Refer to Market Behavior Only, Not Fundamental Store of Value Safety

Understand that these labels do NOT at all mean that one currency is actually a better or less reliable store of value than another, indeed some of the "risk" currencies have much better fundamentals than the safe havens, and are backed by far healthier banking systems that are largely unburdened with bad debt, unlike the USD.

Rather this nomenclature simply refers to how the currencies behave in times of optimism of pessimism.

Because risk and safety assets tend to move in opposite directions at the same, which asset influences which is not always clear to casual observers. To further complicate matters the roles do at times briefly shift, and the primary forces that drive a given currency price can and do change over time.

Appreciating Currencies Affect Their Economies Over a Longer Period Than Stocks Affect Currencies

Short term currency moves thus generally have little short term influence on stocks, whereas short term stock market movements have immediate influence on currency pair prices.

In the long run, a rising currency clearly can hinder economic growth by making a country's exports more expensive, and thus can weigh on stock prices WHEN it becomes clear that the appreciating currency is hindering export growth. That, however, takes time, though on a given day analysts seeking an excuse for stock movements will blame currencies. Often that is misguided.

This is true for all economies to varying degrees, though in fact far less so for the USD, since most of US GDP is from consumer spending, NOT exports. As a net importer, when the US economy is healthy and importing, the US economy reaps benefits, especially in the short term, from a strong USD because the imports become cheaper.

However, most currency trade is from very short term speculative traders, and in the short run, they look to the direction of stocks to decide whether to go long or short on the risk currencies or safety currencies.

Why is the USD a Safe Haven Currency (at least for now)?

Since the current downturn began, the USD started trading as a safe-haven currency, i.e. one that traders buy ONLY in times of rising fear. Without getting too much into the technicalities of why this is the case (like that it's used as a funding currency of carry trades) suffice to say that it behaves this way due to the USD's poor fundamentals, including:

• Low income: yield low short term yields that are likely to be among the last among the major currencies to rise, thus one gets very low returns from holding low risk USD debt

• Low chance of capital gains due to (at least perceived) ballooning supply that is widely believed to virtually guarantee inflation/devaluation), thus making the USD a poor holding for capital appreciation

Currencies always trade in pairs, for example, the EUR/USD. When you buy this pair, you are buying EUR and selling USD. The EUR is valued in USD. Because its yields are low, currency traders tend to borrow (sell) it in order to buy currencies more likely to rise.When stocks retreat, those trades unwind and traders need to buy back the USD when the 'sell ' the EURUSD.
Thus the only reason to hold the USD is that these days it DOES usually behave as a safe haven currency, meaning that it rises when there is risk aversion and falls when there is risk appetite. Because stocks are currently seen by currency traders as the prime barometer of risk appetite, the safe-haven USD falls when stocks rise and vice versa when they come in.

Disclosure: The author has no positions in the above instruments

Opposite Market Reaction to Similar News Implies Rally Exhausted

2009-11-01T04:58:00.000-08:00

Or,

Analyst Angst: Same Event, Opposite Reaction, Proves Sentiment Rules

Or, A Tale of Two Rate Increases: How a Moody World Market Reacted in Opposite Ways to the Same News

What a difference a few weeks can make. Here's a salutary lesson about why markets can be so hard to predict based on fundamentals alone, and why analysts can be right about events and wrong about how the market reacts to them.

While equities tend to drive currency markets, there are times when currency markets can move both equities and commodities. Moreover, the same kind of news can cause the opposite reaction, depending on the market's mood at the time.

If Risk Appetite, Then Rising Rates Imply Recovery

When Australia announced that it was raising interest rates, markets were already in rally mode and moved higher still on the news, citing this first rate increase among the major economies as further proof of ongoing global recovery.

Higher rates meant supported the recovery thesis.

If Risk Aversion, Then Rising Rates Imply Stagnation

Yet just this past week, Norway became the first European country to raise rates. The markets should have been even more thrilled. After all, Australia is part of the higher growth Asian block, and has the fastest growing economies as primary trading partners. Growth comes easier down under. Norway, however, has to manage in a tougher, slower growth neighborhood, Europe. That the Norges Bank would have enough confidence to raise rates could have been seen as even more bullish.

However, markets were already in retreat mode due to justifiable concerns that stocks and other risk assets were already overpriced. Thus when the news about Norway's rate increase came out, the media cited it as one of the reasons for continuing market pullback. Why? Because perhaps the rate increase was premature and would cut off the nascent recovery!

Yes, Norway's rate increase was anticipated, but so was Australia's.

Implications and the Real Lesson—Trend Exhaustion?

The likely resolution of the apparent contradiction is that when Norway's rate hike came, the current rally was simply tired. In other words, those ready to buy had already bought, those who hadn't are waiting for a pullback to buy lower or go short risk assets

The lesson: Before predicting an event's effect on the market, look at a daily chart of the S&P 500. That's my favorite single picture of market sentiment. Feel free to select others that correlate to the asset in question. If the trend is down, even good news could be taken badly, and vice versa. Of course, if a move

Disclosure: No positions in the above instruments

USD SHORT TERM UP, LONG TERM DOWN WITH BOUNCES & WHY

2009-11-01T01:34:00.000-07:00

Despite the justified talk about the USD losing its premier reserve currency and trade benchmark status, it's critical to keep some perspective.

For the Near Term

A Near Term Stock Pullback Is Likely and Should Boost the USD

At present, the only short term reason to hold the USD is because it will benefit from the coming stock pullback and massive USD short unwinding. That, however, is likely to happen and could be a multi-month boost for the USD if the global economy lurches into decline for a double dip recession or even just period of stagnation.

USD due for rally over the coming months both because the USD itself is oversold and the global equities) are still way overvalued/overbought. Most of the time, world stock markets, which are usually best represented by the S&P 500, drive risk and safe haven asset prices. The dollar continues to behave like the #2 most safe haven currency after the Yen. Thus the sharper and more sustained the pullback, the higher and longer the USD rally.

When that rally peaks, then it will be time for those with short term time horizons to get out of USD assets as much as one can.

Even A Worst Case USD Collapse Unlikely for Many Years

Although there is plenty of talk about a sudden collapse in world demand for US debt, such talk strikes one as naïve. In a worst case scenario, which even the current US policy team is unlikely to allow, it's hard to imagine such an event happening for many years.

Why? Because most of the world still very much needs the US currency and economy and will continue to buy its debt and do whatever can be done to support the dollar out of pure self interest.

Virtually every major economy still holds a huge portion of their foreign exchange reserves, typically over half, in dollars. None wants to see those wiped out by a dollar collapse.

The export economies like Japan, the BRICs, OPEC countries, etc, do not want to see their own still massive USD reserves wiped out, nor their best customer. Thus they will do all they can to keep their best customer afloat,( just like US banks lent money to questionable debtors in order to keep their revenues flowing and people employed) at least until they can find other markets to fill the gap the US would leave. That will take time. Yes, they could well get hurt in the long term holding that debt, but leaders tend to deal with short term problems and leave longer term issues for later, or for their successors.

Long Term USD Trend Is Still Likely To Be Down

However, because there has been no change in the fundamental weaknesses of the USD, in the longer term i.e. over the coming years, there is no reason to believe at this time that the USD's downtrend will not resume.

Likely events that could yet save the USD:

1. Stock market pullback - likely. The USD still behaves as a safe haven currency for which demand rises in times of fear, especially given the extreme # of USD shorts that will need to buy dollars in order to exit their positions. As long as unemployment remains a problem, incomes, consumer spending and ability to repay debt will be weak. That means that GDP (70% is consumer spending), banking and housing, the sources of the current crisis, will remain troubled and likely lead stocks back down. It's unclear how long stocks will drop or stay down, but that's likely to be a matter of months, not many years.

2. Fed starts raising rates – very unlikely

Jobs and personal income are at the heart of the US recovery story, until these improve, there can be no meaningful US recovery. (though jobs growth has typically been a lagging indicator). Why? As noted above

• 70% of US GDP is consumer spending

• the banking and housing sectors, which led the US in and will lead it out of the current crisis, cannot recover unless Americans can pay their debts and spend enough to allow commercial real estate and debt to recover.

Low rates also keep the USD low and make US exports cheaper.

Finally, while the Fed has all the above incentive to keep rates low, it doesn't have strong reasons to raise rates in the near term. As noted above, large foreign holders of US dollars and debt may complain about the dollar, but they still need it and the US economy, so they will not walk away from US debt purchases, though they can and will do all they can to diversify more out of the dollar

Relative USD Strength—Possibly

Currencies trade in pairs, one valued against the other, so it's all relative. For example, a currency like the euro has had a huge run against the dollar, but not due to any major improvements in its own underlying fundamentals or interest rates. Rather, the USD was getting weaker and sentiment was turning sharply against it. This relativity can work in favor of the USD if another of its major crosses experiences new troubles, as long as the dollar doesn't also appear to be deteriorating.

Coordinated International Support – Likely

For reasons stated above, the US and the rest of the developed world will come together – fast, to lend support if the dollar really gets in trouble.

In sum, the likely USD trends are:

For the short term (coming weeks to months), up.

For the longer term, down – but not out, and with very tradable bounces.

Disclosure: long USD, UUP.

GLOBAL OUTLOOK 10/29 Full Version: Markets RETREAT, Will GDP Save Them?

2009-10-29T02:55:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Wednesday: Asia, Europe, US down Thursday morning Asia, Europe down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against most majors(down against Yen, & GBP(?!))

- Main events today: USD: Advanced Q3 GDP, unemployment w/w, earnings: Thursday 10/28 Aetna (AET), Colgate-Palmolive (CL), France Telecom (FTE), Hertz Global (HTZ), Hitachi (HIT), MetLife MET), Moody’s Corp. (MCO), Motorola (MOT), Proctor & Gamble (PG), Taiwan Semiconductor (TSM), Waste Management (WM)

- Big Theme: FEAR, but risk assets attempting small rally early Thursday. Excessive valuations, oversold USD, uncertainty ahead of US Q3 GDP Thursday all combine to drive risk assets down, JPY, USD, CHF up (in that order) SEE: WHY CORRECTION COULD BECOME A COLLAPSE in the FULL VERSION'S for other underlying market weaknesses.

STOCKS

US: The S&P 500 fell for the 4th time in 5 days, closed below its 50-day moving average for the first time since mid-July as sellers moved en masse as fears that stocks are overvalued were fed by a much worse than expected existing home sales data and doubts that today's advance third quarter GDP reading will meet expectations of 3.3% annualized growth. For example, Goldman Sachs forecasts an annualized Q3 rate of 2.7%. Like GS, most do anticipate that the Q3 GDP will indeed show positive growth and signal an end to the worst decline since the Great Depression, one that has seen 4 straight quarters of contraction.

Stocks were mired in weakness for virtually the entire session as buyers stepped to the sidelines despite another batch of generally better-than-expected earnings. Stiff selling in overseas trade certainly didn't help the case for bulls, nor did disappointing new home sales data, which showed that new home sales for September fell 3.6% month-over-month to an annualized rate of 402,000 units. That was well below the rate of 440,000 units that was widely expected.

The disappointing report caused an immediate drop in stocks, though a premarket durable goods orders report that was largely dismissed. According to that report, durable goods orders were up 1.0% in September, in-line with expectations, while orders less transportation increased a stronger-than-expected 0.9%.

Partial to selling, participants pushed stocks to their worst loss since the start of the month and left the S&P 500 to trade below its 50-day moving average. The technical line initially provided some support, but persistent pressure took the stock market through the line and left it to finish near session lows.

Declines were steep and broad based as nine of the 10 major sectors posted losses.

Financials were among the worst performers this session. The sector dropped 3.2% amid ongoing weakness in bank stocks. Including this session's 3.2% decline, the KBW Banking Index has fallen more than 9% during the past four sessions.

Visa (V 76.57, +2.67) was one of the few financial issues to post a gain this session. The company garnered support after it posted last evening better-than-expected adjusted earnings of $0.74 per share.

Materials stocks were also wrought with weakness. The sector fell nearly 3.2% as the greenback gained 0.5% against a basket of major foreign currencies, causing weakness among basic materials stocks and commodities-related stocks.

Softer oil prices and broader market weakness took the energy sector to a 2.9% loss. Better-than-expected earnings from ConocoPhillips (COP 49.49, -1.41) did nothing for the sector.

Telecom stocks made up the only sector to advance. What's more, its 1.8% gain was the sector's best single-session advance in one month and came in the face of considerable weakness in the broader market. Its gain this session extended the previous session's advance. In the weeks preceding that point, telecom had been considerably underperforming the broader market.

Participation was strong this session. Specifically, nearly 1.7 billion shares exchanged hands on the NYSE. That's the highest level in more than one month and exceeds both the 50-day and 200-day moving average for trading volume.

Another round of Treasury auctions was met with solid turnout. An auction of 5-year Notes produced an above-average bid-to-cover ratio 2.6. Though Treasuries pulled back a bit following the announcement, weakness among equities helped Treasuries hold onto gains. In turn, the yield on the benchmark 10-year Note has fallen to roughly 3.4% from 3.5% in just two days.

Treasuries have performed well this week and stocks are now down more than 3% week-to-date, but both fixed income traders and equity market participants are turning their attention to the advance third quarter GDP report, which is a headline event for Thursday morning.

Advancing Sectors: Telecom (+1.8%)

Declining Sectors: Financials (-3.2%), Materials (-3.2%), Energy (-2.9%), Consumer Discretionary (-2.8%), Industrials (-2.2%), Tech (-1.8%), Health Care (-1.3%), Utilities (-1.0%), Consumer Staples (-0.4%)DJ30 -119.48 NASDAQ -56.48 NQ100 -2.4% R2K -3.5% SP400 -3.3% SP500 -20.78 NASDAQ Adv/Vol/Dec 411/2.75 bln/2290 NYSE Adv/Vol/Dec 322/1.68 bln/2779

Housing Trouble (from fx360.com)

The report on New Home Sales accelerated the pace of this week’s decline in currencies like the euro and Australian dollar. The number was so far below expectations that the shock single-handedly took all the life out of the markets. Sales of new homes, which account for only 10% of the housing market, slid by 3.6% compared with a consensus that the figure would actually rise by 2.6%. To top things off, median prices fell at an accelerating rate and inventories fell to the lowest levels in more than twenty-five years as construction has come to a grinding halt. The main fear factor that this report provides is that buyers have turned away knowing that first-time buyer rebates would soon come to an end. On that note, the theory that government efforts have been the only factors supporting housing are an unwelcomed thought in any investors mind. Government uncertainty on whether the program will be extended is only adding on to market stress. Nevertheless, this one report does not spell the end of the housing market or predicts another cataclysmic drop. Considering the fact that existing home sales, which represents a much larger portion of the housing market, was much better than expectations suggests that all is not lost in the troubled industry.

Signs of renewed housing distress completely overshadowed the slight improvement in Durable Goods Orders. The figure was in-line with expectations and increased to 1.0% from -2.4%, posting its fourth improvement in the last six months. However, durables were unable to excite markets because ex-defense capital goods, an important component in GDP calculations, actually shrunk by 0.2%.

Reasons Why this Correction Could Become a Collapse: Excerpt from Simon Maierhofer article on Yahoo! Finance

1. Financials, real estate, homebuilders led the collapse and March rally, but are fading now:

Throughout the financial meltdown financials, real estate, and homebuilders fell harder and faster than broad market indexes a la S&P 500 and Dow Jones Beginning with the miraculous March revival (more about that in a moment), the broad market rose while financials, real estate, and homebuilders soared.

Those three sectors led the decline and led the subsequent (mock) recovery. Since it is reasonable to assume that those sectors will continue to lead the market throughout this economic cycle, it behooves investors to watch such leading sectors closely.

The S&P 500 recorded a closing high on October 19th at 1,097. The Financial Select Sector SPDRs XLF reached their closing high a few days earlier on October 15th. Since their respective closing highs, the S&P 500 has dropped 2.82%, while XLF has already shed 5.64%.

A more pronounced performance slump is visible in the home builders sector. The SPDR S&P Homebuilders ETF (NYSEArca: XHB - News) peaked on September 16th and has fallen 9.97% since. Keep in mind that XHB's lackluster performance comes on the heels of the biggest monthly increase in total home sales in ten years.

Even though the inventory of existing homes fell 7.5% month-over month in September (to 3.6 million units), the shadow inventory of 3.5 million foreclosed homes is probably weighing heavily on home builders. Shadow inventory represents foreclosed homes that are vacant, still included on bank's balance sheets, but have not hit the market yet. 3.5 million homes equal about 1 - 2 years worth of supply.

2. Technology sector still hurting:

Apple over 10% to new all-time highs. Microsoft reported better than expected numbers and spiked 7.4%. Investors loved Amazon's outlook so much that they bid up the stock by over 33%. Combined, the three companies account for nearly 24% of the yet the Nasdaq is traded lower today than before earnings season on October 14th. The same is true for the Technology Select Sector SPDRs (XLK)

If 24% of the Nasdaq's components rallied between 7 and 33%, without lifting the index, a lot of tech companies must be hurting. In fact, the Nasdaq's (Nasdaq: QQQQ - News) performance is masking the decline IBM, Intel, and many other once high-flying tech companies have seen over the past 1-2 weeks.

3. Consumer Demand Gone

Manufacturing has shown improvement and increased production. However, this appears to be mostly due to restocking inventories that were slowly depleted as cash strapped businesses and consumers cut purchases. How do we know? Look at shipping volumes. Genuine demand should be reflected in increased activity in the shipping and packaging sector. However, the opposite is occurring:

• UPS reported falling shipping volume for the 7th straight quarter, and profits are down 43% over the past 12 months

• Burlington Northern, the largest component of the Dow Transportation Average reported a 27% decrease in freight revenue from Q3 of 08.

5. Demand Gone Until Employment & Personal Incomes Improve:

No one disputes that the US along with much of the developed world is continuing to lose jobs, with predictable downward pressure on wages, hours and incomes from those still working. Because 70% of US GDP is comprised of consumer spending, there can be no sustained meaningful improvement in US growth until the jobs and income picture improves so that US consumers can pick up spending.

6. Weak Consumer Spending Means Weak Banks, Housing: Until then, spending will be weak, which means commercial and residential real estate loan defaults will continue, which means the banks will continue to hold massive and growing debt portfolios, try as they may to hide them with regulator cooperation

7. Grossly Overpriced Stocks: We have repeatedly pointed out cases of stocks that have risen (because they beat lowball estimates) to levels at or higher than they were over a year ago, yet revenues and / or earnings are lower. Per available data from Standard &Poors & Robert Shiller, price to earnings ratios for the S&P are now at an astounding 143. Historically p/e ratios are around 15-20, and per Dr. Nuriel Roubini at market bottoms hit 10-12. Even at the recent March 2009 bottom, p/e ratios never got close to that low level.

In sum, the current rally is an irrational bubble to be shorted, or at least avoided on the long side. How far can it fall? Another 10-20% is a safe minimal guess, assuming Washington comes out with more stimulus to keep the markets from full fledged panic. Because markets often overreact, a test of March or November lows is also perfectly possible.

Asia: Asian stock markets fell for a third day Thursday after a Wall Street sell-off on signs of weakness in the U.S. housing market triggered fears about the health of the global recovery. Tokyo, Hong Kong, Shanghai and Seoul all lost about 2 percent or more after a U.S. government report showed new home sales fell unexpectedly in September for the first time since March. That fueled fears the housing rebound was driven solely by government policies that are being withdrawn before the private sector recovers. Adding to investor nervousness was Norway's decision Wednesday to become the first European country to raise interest rates since the crisis began, one analyst said said. That prompted worries governments might be withdrawing stimulus measures before private sector activity has fully recovered, he said.

"Concerns are that if this support wanes or is withdrawn and the private sector is unable to replace government monetary actions, there could be another economic slump,"

Europe: Oct. 28 (Bloomberg) -- European stock-indexes hit 3 week low fell and Asian shares declined as SAP AG cut its software sales forecast and Canon Inc. posted a seventh straight quarterly profit drop. U.S. futures were little changed.

GLOBAL

MARKETS Monday

ASIA- DOWN N225I -1.35% HS -1.84 % SSEC +0.33% FTSTI -1.38% AORD -1.42 %

EUROPE DOWN FTSE -2.32% DAX –2.46% CAC -2.14%

US- DOWN S&P -1.95% DJIA -1.21% NASDAQ -2.67%

THIS MORNING

ASIA DOWN

N225I -1.83% HS -2.28 % SSEC -2.34% FTSTI -0.59% AORD -2.39 %

EUROPE: DOWN

FTSE -0.26% DAX -0.37% CAC -0.14%

COMMODITIES: With the dollar gaining ground for the fifth straight session, the CRB Commodity Index fell 2.0% in its worst single-session loss in one month. Both metals prices and energy prices weighed heavily on the CRB. Unwinding of long trades accelerating

Oil: Late Wednesday crude oil prices dropped 2.8% to $77.44 per barrel following disappointing gasoline inventory data.

Oil prices slid to near $77 a barrel in Asia as an unexpected jump in U.S. gasoline supplies cast doubt on the strength of a recovery in crude demand.

Gold: In US trade Wednesday, Gold prices settled pit trade 0.5% lower at $1030.50 per ounce, below their 2008 high of $1033.90 per ounce. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Strong bias to safety currencies with falling stocks and weak new US home sales dent risk appetite. Heavy short positioning unwinding on the USD at the expense of the commodity fx and EUR. in the face of falling stocks and risk appetite, raising the USD's safe-haven appeal. Most USD and Yen crosses lost ground against them in more of a short squeeze sparked by the stock pullback than any shift in underlying fundamentals. Traders said short-term speculators had been pocketing gains, with hedge funds said to be booking profits ahead of their business year-end in November, and as the recent rebound in both the yen and the dollar saw bets on their weakness unwound.

USD: while the dollar index <.DXY> rose to its highest in two weeks, pulling further off a 14-month trough hit last week. Gaining against all majors except the JPY and surprisingly, the GBP.

Dollar performance was modestly positive versus most of the majors as US equities were relatively flat and Treasurys were in demand following a good 2y auction and some disappointing economic data. The S&P CaseShiller Home Price Index was slightly better than expectations at -11.32% but the Conference Board Consumer Confidence reading disappointed at 47.7 versus consensus 53.5. The weak consumer confidence figure likely attracted investors to the safety of Treasurys, especially with 2y yields above 1%. The 2y auction bid-cover was 3.63x, compared to an average cover of 2.69x, and indirect bidders took 44.5%, compared to a 10 auction average of 42.6%. There was also a very significant allocation to direct bidders in the auction at 26.1%, which dwarfed the previous high. 2y yields are 0.9260% at the time of writing and 10y and 30y yields also dropped during the session. Data ahead includes durable goods orders. The next Treasury auction is for the 5y note.

EUR- The euro rose to $1.4717 from $1.4714 in early Thursday trade, but remains near a 2 week low against the USD

Eurozone M3 data disappointed expectations at 1.8% y/y , down from 2.5% y/y in August and versus consensus 2.2% y/y. This is the lowest y/y rate of M3 growth ever for this series, which goes back to 1971. We expect German CPI to remain weak and Eurozone CPI, which will be released on Thursday, is also expected to remain in negative territory. We continue to target EURUSD back at 1.45 in 1m as sentiment is clearly showing signs of strain.

The weakness in the euro was caused more by cross selling in the EUR/GBP rather than any fundamental factors. The pair has skyrocketed on Friday after UK disastrous GDP data but has since traded steadily lower as demand for cable from the Middle East and profit taking continue to weigh on the euro leg.

Despite the very weak economic data, pound has managed to hold its ground relatively well with market still unclear whether the BoE will increase its QE measures at its next meeting in November. If MPC officials feel that the Q3 data was the nadir of economic activity in UK, they may remain stationary which will be viewed as bullish for sterling and may push the EUR/GBP cross below .9000 as further positional adjustments take place.

However, the EURUSD could drop to about 1.4600 and still have its uptrend intact.

JPY - the dollar yen to 90.29 yen from 90.64 yen, as falling stocks and yen purchases by Japanese exporters lent support to the JPY.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”

MoF Fujii said that competitive devaluations would ruin the world economy but cautioned that this comment should not be interpreted to mean that he favours a stronger JPY. He added that a weak JPY is helpful for exports, but that policy should not be steered by this consideration alone. On the USD, Fujii said that it is natural for Japan to hold the strongest currency in its FX reserves and that Japan's FX policy may actually be supporting the USD. We remain long USDJPY as a trade recommendation from 90.50.

GBP – Surprisingly continues to recover vs. the EUR and USD in the past 3 sessions and into Thursday in what appears to be a reaction bounce after last week's big drop on poor Q3 GDP fed by a EURGBP selloff and willingness to wait for a clearer picture of QE policy.

AUD: Down The Australian dollar fell almost 2 percent against the U.S. dollar on Wednesday, clocking up its biggest one-day fall in

nearly two months.

NZD: Continuing to fall against the USD as risk aversion driven profit taking continues, hitting 3 week lows against JPY, USD. Sold off after the Reserve Bank of New Zealand (RBNZ) dropped its easing bias, as expected, but faced downward market pressure after a promise to hold rates low for longer than the previously expected first quarter in 2010. The kiwi shed 3 percent, its steepest drop since June, and lost 4 percent on the yen, its biggest decline since February.

CAD: stabilizing with oil after days of decline

CHF: gaining slightly against the EUR and USD in early Wednesday trade after struggling for the past 2 days

NOK: Norges Bank (CB of Norway) becomes first EZ central bank to raise interest rates, doing so by 25 basis points in line w/ expectations. Norges Bank expects to raise rates to around 2.75% by the end of 2010, though others expect they could go as high as 4%.

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, also the GBP/USD for more pullbacks on a sustained break below 1.6300. Crude oil is dropping, no strong support level until about $74 (see daily chart below for details). We favor going short on crude because it has broken below $78 (fibonaccci 23.6% retracement which has held as support for the past week) as long as stocks continue to drop. Look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order). NB risk assets rising as of this writing.

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no strong price support before around the $74 level, though at $77.81 there is a 23.6% Fibonacci retracement level that has held for the past week, and at about $75.50 there is a convergence of a 38.2% Fibonacci retracement and and a 1 standard deviation Bollinger Band. See chart.

Daily Chart Crude Oil Oct 29- No strong support until around $74,( but have minor support at $77.81 already broken, then at $75.51) where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

02 oct 29

FX TRADE OF THE DAY (from fx360.com)

EUR/USD: Currency in Play for Next 24 Hours

EUR/USD will be the currency pair in play for Thursday. On its way from the Euro-zone include the German Unemployment at 4:55 am ET or 8:55 GMT and Consumer and Economic Confidence at 6:00 am ET or 10:00 GMT. The US, on the other hand, will be releasing Gross Domestic Product and Personal Consumption for 8:30 am ET or 12:30 GMT.

EUR/USD suffered a sharp fall today which kept the pair deeply within the Bollinger band range trading zone. The euro will encounter two major levels of support if the selloff continues to gain momentum. The first will be at the psychological level of 1.4600 followed by 1.4500, a low from earlier this month. Resistance stands at 1.4843 or the high from September 23 rd . If support is breached, the uptrend in EUR/USD may be invalidated in turn for a more severe correction. However, at this point, the trend is still intact.

03 oct 29

OTHER HEADLINES

World Series Starts Tonight, Yankees go for 27th World Series, Victory to Lift Wall Street Sentiment

(Bloomberg)

India Begins Exit From Monetary Stimulus With Order to Buy Government Debt

SAP Cuts Full-Year Sales Forecast as Customers Reduce Spending on Software

•European Stock-Index Futures Retreat; Asian Shares Decline on Canon Profit

•Nomura Resumes Dividend Payouts After Quarterly Net Profit Beats Estimates

•BG Group Third-Quarter Profit Declines 44% on Lower Gas Demand, LNG Prices

•Deutsche Bank Said Near Deal to Buy Wealth Manager Sal. Oppenheim Holding

(Seekingalpha.com)

How to Play the Gold / Silver Ratio

Sugar ETN Continues Its Wild Ride

Official Release

August Housing Numbers Across Various Indices Don't Yet Show Genuine Recovery

Parsing the S&P/Case-Shiller August 2009 Housing Report

Trying to Gauge Where Oil Is HeadedUnderstanding Energy: Professional Money Management and Peak Oil

by Gregor Macdonald

World Series of Crude Oil: Winner Decides Winter Gasoline Prices

by Bob van der Valk

World Recovery Is in the Hands of OPEC

by Andrew Butter

Crude Oil and Gold: Not Worth Worrying Overby Sold At The Top

August Case-Shiller Housing Numbers

by Bespoke Investment Group

(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 10/28 CHEAT SHEET:MARKETS RETREAT AGAIN, AWAIT US GDP

2009-10-29T02:46:00.000-07:00

EUR/USD will be the currency pair in play for Thursday. On its way from the Euro-zone include the German Unemployment at 4:55 am ET or 8:55 GMT and Consumer and Economic Confidence at 6:00 am ET or 10:00 GMT. The US, on the other hand, will be releasing Gross Domestic Product and Personal Consumption for 8:30 am ET or 12:30 GMT.

EUR/USD suffered a sharp fall today which kept the pair deeply within the Bollinger band range trading zone. The euro will encounter two major levels of support if the selloff continues to gain momentum. The first will be at the psychological level of 1.4600 followed by 1.4500, a low from earlier this month. Resistance stands at 1.4843 or the high from September 23 rd . If support is breached, the uptrend in EUR/USD may be invalidated in turn for a more severe correction. However, at this point, the trend is still intact.

03 oct 29

OTHER HEADLINES

World Series Starts Tonight, Yankees go for 27th World Series, Victory to Lift Wall Street Sentiment

(Bloomberg)

India Begins Exit From Monetary Stimulus With Order to Buy Government Debt

SAP Cuts Full-Year Sales Forecast as Customers Reduce Spending on Software

•European Stock-Index Futures Retreat; Asian Shares Decline on Canon Profit

•Nomura Resumes Dividend Payouts After Quarterly Net Profit Beats Estimates

•BG Group Third-Quarter Profit Declines 44% on Lower Gas Demand, LNG Prices

•Deutsche Bank Said Near Deal to Buy Wealth Manager Sal. Oppenheim Holding

(Seekingalpha.com)

How to Play the Gold / Silver Ratio

Sugar ETN Continues Its Wild Ride

Official Release

August Housing Numbers Across Various Indices Don't Yet Show Genuine Recovery

Parsing the S&P/Case-Shiller August 2009 Housing Report

Trying to Gauge Where Oil Is HeadedUnderstanding Energy: Professional Money Management and Peak Oil

by Gregor Macdonald

World Series of Crude Oil: Winner Decides Winter Gasoline Prices

by Bob van der Valk

World Recovery Is in the Hands of OPEC

by Andrew Butter

Crude Oil and Gold: Not Worth Worrying Overby Sold At The Top

August Case-Shiller Housing Numbers

by Bespoke Investment Group

(AP)

Barrage of earnings, economic data to drive market- AP

Beating the Street is an easy feat for companies- AP

Earnings reports to give picture of job market- AP

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 10/28 Cheat Sheet -Why this Correction Could Become a Collapse

2009-10-28T02:26:00.000-07:00

Daily Chart Crude Oil Oct 28- No strong support until around $74, but have minor support at $77.81 & $75.50) where we get a convergence of an established support/resistance price level, Bollinger Band, and 50% Fibonacci retracement. Until then, nothing but air. However, oil is likely to continue following stocks, so if stocks can hold steady, oil may well do likewise, though it does tend to be more volatile and exaggerate equity market moves, so oil could make some further declines on its own.

01 oct 28

DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS POSITIONS IN ABOVE INSTRUMENTS.

GLOBAL OUTLOOK 10/28 + Why this Correction Could Become a Collapse

2009-10-28T02:13:00.000-07:00

SUMMARY –NB SEE WEEKLY OUTLOOK FOR MORE ON ALL OF THE BELOW INSTRUMENTS

- Stocks: Tuesday: Asia down, Europe mixed, US down Wednesday morning Asia down, Europe opening down

- FX: Lower equities, bias to safety currencies [JPY, USD, CHF in order of safety appeal] in favor of risk currencies [AUD, NZD, CAD, EUR, GBP in order of risk appetite appeal], USD gains against most majors(down against Yen)

- Main events today:AUD: CPI q/q NZD: NBNZ Business Conference Rate Statement, USD: Durable goods, New Home Sales earnings: Wednesday 10/28: Aflac (AFL), Coca-Cola Ent. (CCE), ConocoPhillips (CON), Eni (E), General Dynamics (GD), GlaxoSmithKline (GSK), Goodyear Tire & Rubber (GT), SAP (SAP)

- Big Theme: Risk Appetite Becomes Nausea? Excessive valuations, oversold USD, uncertainty ahead of US GDP Friday In addition to earnings, Friday's US Advanced GDP, next Friday's NFP are the big events, though US Treasury bond auctions could create volatility if demand isn't good. So far, it's been fine. SEE FULL VERSION: WHY CORRECTION COULD BECOME A COLLAPSE

STOCKS

US: Two of the three major indexes finished lower as continuing concerns about already high valuations was somewhat moderated by some overall positive earnings news.

The Dow was able to net a modest gain as Exxon Mobil (XOM 74.91, +1.68) and Chevron (CVX 76.59, +1.14) shared in strength stemming from a better-than-expected earnings report from BP PLC (BP 57.82, +2.34). IBM (IBM 120.65, +0.54) also provided leadership to blue chips by announcing that it has authorized $5.0 billion for stock repurchases, which not only help improve earnings per share results by reducing the number of outstanding shares, but also sends a signal to investors that strong companies are now willing to fund buybacks, rather than stash cash into their coffers amid economic tumult.

Despite IBM's strength, many large-cap tech issues traded as laggards following downside guidance from Internet search engine Baidu.com (BIDU 383.66, -49.31). Collective weakness among large-cap tech caused the Nasdaq to underperform the other headline indices.

Shares of consumer discretionary stocks were among the worst performers this session, though. They dropped 1.7% as retailers recoiled following a disappointing Consumer Confidence Index reading of 47.7 for October. The consensus had called for a reading of 53.5. Even shares of Under Armour (UA 29.27, -3.82) slumped, despite better-than-expected quarterly earnings and a raised forecast.

Note that for the past years, falling stocks has generally caused the USD to rise against other currencies as a safe haven. Given the US Government's massive Treasury bond auction this week, it is indeed convenient that the market began pulling back last week. This pleasant coincidence has not gone unnoticed in the blogosphere. Conspiracy theories, anyone?

Reasons Why this Correction Could Become a Collapse

1. Fading LeadersFinancials, real estate, homebuilders led the collapse and March rally, but are fading now:

Throughout the financial meltdown financials, real estate, and homebuilders fell harder and faster than broad market indexes like the S&P 500, Beginning with the March rally the broad market rose while financials, real estate, and homebuilders soared.

Those three sectors led the decline and led the subsequent dubious recovery. So it behooves investors to watch such leading sectors closely.

The S&P 500 recorded a closing high on October 19th at 1,097. The Financial Select Sector SPDRs (XLF) reached their closing high a few days before on October 15th. Since their respective closing highs, the S&P 500 has dropped 2.82%, while XLF has already shed 5.64%.

The home builders sector faired worse. The SPDR S&P Homebuilders ETF (XHB) peaked on September 16th and has fallen 9.97% since. Note that XHB's lackluster performance comes on the heels of the biggest monthly increase in total home sales in ten years.

Even though the inventory of existing homes fell 7.5% month-over month in September (to 3.6 million units), the shadow inventory of 3.5 million foreclosed homes is weighing heavily on home builders. Shadow inventory represents foreclosed homes that are vacant, still included on bank's balance sheets, but have not hit the market yet. 3.5 million homes equal about 1 - 2 years worth of supply.

2. Technology sector still hurting:

Apple reported great earnings and rallied over 10% to new all-time highs. Microsoft reported better than expected numbers and spiked 7.4%. Investors loved Amazon's outlook so much that they bid up the stock by over 33%. Combined, the three companies account for nearly 24% of the Nasdaq, yet the Nasdaq is traded lower today than before earnings season on October 14th. The same is true for the Technology Select Sector SPDRs (XLK).

If 24% of the Nasdaq's components rallied between 7 and 33%, without lifting the index, a lot of tech companies must be hurting. In fact, the Nasdaq's (Nasdaq: QQQQ - News) performance is masking the decline IBM, Intel, and many others.

In addition to the above article excerpts, consider:

3. Consumer Demand Gone

Manufacturing has shown improvement and increased production. However, this appears to be mostly due to restocking inventories that were slowly depleted as cash strapped businesses and consumers cut purchases. How do we know? Look at shipping volumes. Genuine demand should be reflected in increased activity in the shipping and packaging sector. However, the opposite is occurring:

• UPS reported falling shipping volume for the 7th straight quarter, and profits are down 43% over the past 12 months

• Burlington Northern, the largest component of the Dow Transportation Average reported a 27% decrease in freight revenue from Q3 of 08.

5. Demand Gone Until Employment & Personal Incomes Improve:

No one disputes that the US along with much of the developed world is continuing to lose jobs, with predictable downward pressure on wages, hours and incomes from those still working. Because 70% of US GDP is comprised of consumer spending, there can be no sustained meaningful improvement in US growth until the jobs and income picture improves so that US consumers can pick up spending.

6. Weak Consumer Spending Means Weak Banks, Housing: Until then, spending will be weak, which means commercial and residential real estate loan defaults will continue, which means the banks will continue to hold massive and growing debt portfolios, try as they may to hide them with regulator cooperation

7. Grossly Overpriced Stocks: We have repeatedly pointed out cases of stocks that have risen (because they beat lowball estimates) to levels at or higher than they were over a year ago, yet revenues and / or earnings are lower. Per available data from Standard &Poors & Robert Shiller, price to earnings ratios for the S&P are now at an astounding 143. Historically p/e ratios are around 15-20, and per Dr. Nuriel Roubini at market bottoms hit 10-12. Even at the recent March 2009 bottom, p/e ratios never got close to that low level.

In sum, the current rally is an irrational bubble to be shorted, or at least avoided on the long side. How far can it fall? Another 10-20% is a safe minimal guess, assuming Washington comes out with more stimulus to keep the markets from full fledged panic. Because markets often overreact, a test of March or November lows is also perfectly possible.

Asia: Asian stocks were lower for a second day Wednesday amid worries U.S. consumers were continuing to struggle, undermining hopes for a quicker turnaround in an economy that's a major export market for the region.

Europe: Oct. 28 (Bloomberg) -- European stock-indexes hit 3 week low fell and Asian shares declined as SAP AG cut its software sales forecast and Canon Inc. posted a seventh straight quarterly profit drop. U.S. futures were little changed.

COMMODITIES: Down Monday with stocks as risk appetite retreated and the dollar gained. See weekly analysis for more on all of these.

Oil: TOKYO, Oct 28 (Reuters) - Oil was steady around $79.50 a barrel on Wednesday, supported by industry data showing a surprise large drawdown in U.S. crude inventories that blunted the impact of a strengthening dollar and weak Asian equities. As the dollar strengthens, crude becomes more expensive for holders of foreign currencies. Traders also await U.S. gross domestic product (GDP) data, due to be released on Thursday. Analysts expect it to show that the world's largest economy grew 3.3 percent in the third quarter, but a lower growth figure could prompt a sell-off in riskier commodities whose prices have rallied this month.

Gold: Gold prices steadied around $1,040 per ounce on Wednesday, recovering from three-week lows hit the day before when the dollar strengthened against the euro. Although gold price has been in consolidation for 2 weeks, net speculation long positions remained close to all-time high level. It's likely for the correction to take place for some more time and gold may need to correct further to 1026 to remove the positioning risk.

CURRENCIES: Bias to safety currencies with falling stocks. Heavy short positioning on the USD made traders hesitant to continue selling it, and more inclined to unwind existing USD shorts, in the face of falling stocks and risk appetite, which heighten the USD's safe-haven appeal. Most USD crosses lost ground against it.

USD: The U.S. dollar gained 0.2% against a basket of foreign currencies. The Dollar Index has now advanced for four straight sessions.

Dollar performance was modestly positive versus most of the majors as US equities were relatively flat and Treasuries were in demand following a good 2y auction and some disappointing economic data. The S&P CaseShiller Home Price Index was slightly better than expectations at -11.32% but the Conference Board Consumer Confidence reading disappointed at 47.7 versus consensus 53.5. The weak consumer confidence figure likely attracted investors to the safety of Treasuries, especially with 2y yields above 1%. The 2y auction bid-cover was 3.63x, compared to an average cover of 2.69x, and indirect bidders took 44.5%, compared to a 10 auction average of 42.6%. There was also a very significant allocation to direct bidders in the auction at 26.1%, which dwarfed the previous high. 2y yields are 0.9260% at the time of writing and 10y and 30y yields also dropped during the session. Data ahead includes durable goods orders. The next Treasury auction is for the 5y note.

EUR- Down vs. the USD Tuesday to around 1.4800 (-200 pips about 1% in 2 days), steady Wed. above 1.4800. The risk asset trade has run into a wall of serious resistance as key psychological points. With Dow struggling at 10,000 S&P capped at 1100 and EUR/USD battling with 1.5000 the recovery rally looks exhausted as most of the good news appears to have been priced in. Yesterday’s sharp drop in the EUR/USD was classic case of stop tripping in FX as the 1.5000 level failed to hold for the fourth time in a row. With the EZ calendar quiet for Wednesday, the major news is due from the US session during which the main news release will be Consumer confidence at 14:00 GMT. Given the U of Michigan miss and stagnant unemployment data, there's a strong chance of a negative surprise, which could spark further risk aversion in stocks and further drag the EURUSD down to test 1.4800.

JPY - USDJPY fell from over 92 to around 91.24, as falling stocks and yen purchases by Japanese exporters lent support to the JPY.

Large Japanese manufacturers expected the yen to average 94.50 per dollar in the 12 months to March 2010, according to the Bank of Japan’s quarterly Tankan survey released Oct. 1. The forecast in the previous report was for a rate of 94.85.

“There’s talk that exporters are buying the yen,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is causing the dollar-yen to dip.”

MoF Fujii said that competitive devaluations would ruin the world economy but cautioned that this comment should not be interpreted to mean that he favours a stronger JPY. He added that a weak JPY is helpful for exports, but that policy should not be steered by this consideration alone. On the USD, Fujii said that it is natural for Japan to hold the strongest currency in its FX reserves and that Japan's FX policy may actually be supporting the USD. We remain long USDJPY as a trade recommendation from 90.50.

GBP – Recovering against the EUR and USD in the past 2 sessions in what appears to be a reaction bounce after last week's big drop on poor Q3 GDP

AUD: Down 0.7% against the USD as it the AUD drops with stocks and other risk assets.

For the RBA, the below expectations PPI data showed the sharp AUD rebound is clearly slowing upstream price pressure (that should flow through to CPI over coming quarters) by causing import prices to drop at a record pace over the last two quarters. Further, the core PPI had a 3rd straight fall - sufficiently weak to signal slowing in core CPI over coming quarters (towards 2%). However, for the near term - the weaker than expected PPI may not fully translate through to Q3 CPI given lags, and another strong (+1.2% q/q) rise in house construction costs adds modest upside risk to our economists' Q3 headline inflation forecast of 0.7% q/q. With 100bp of tightening already priced for the next 3 RBA meetings, a topside surprise in CPI is needed to justify AUD at these levels.

NZD: Continuing to fall against the USD as risk aversion driven profit taking continues

CAD: stabilizing with oil after days of decline

CHF: gaining slightly against the EUR and USD in early Wednesday trade after struggling for the past 2 days

CONCLUSIONS: New Trading Ideas: If stocks steady or falling, then continue to watch for USD rallies against the EUR and commodity currencies, GBP/USD for more pullbacks on a sustained break below 1.6300, and crude oil has begun to pull back, no strong support level until about $74 (see daily chart below). We favor going short on crude if it breaks below $78 (fibonaccci 23.6% retracement which has held as support for the past week) look to trade at either extreme long or short depending on stocks. NB If continued pullback in stocks, expect other risk assets and currencies to follow, with biggest move from the most oversold (USD) and overbought (crude, gold, commodity currencies, stocks, in that order).

Trading Opportunities: Near term favors higher yielding and commodity currencies, but that could change fast if equities pull back, no trend continues forever. Thus: 1. be prepared to play a pullback in risk assets and get ready to sell stock indexes, commodities, and risk currencies, buying USD, JPY. 2. Trade the near term horizontal trading ranges that should hold until major news causes a change in risk appetite. 3. Those continuing to take long positions in risk assets should consider tight sell stops, though gold and crude may be approaching new breakouts. Crude oil may be beginning pullback Always use sell stop orders.

Crude Oil

Made its first major move down Friday as it followed stocks lower, after it breached new annual highs around $82. Given the fast recent rise, no strong price support before around the $74 level, though at $77.81 there is a 23.6% Fibonacci retracement level that has held for the past week, and at about $75.50 there is a convergence of a 38.2% Fibonacci retracement and a 1 standard deviation Bollinger Band. See chart.

Why Gold’s Sudden Move? The Greatest Confidence Game Unraveling?

2009-09-09T07:15:00.001-07:00

For those who don’t follow at least the big picture of currencies and commodities, here’s something you should read, because you may see that you need to start paying a bit more attention. The US dollars status as reserve currency, though safe in the near term despite the hype otherwise, is ultimately based on confidence, as is the case with any fiat money.

Does gold’s move this past week suggest that the rest of the world has lost faith?

Chronicle of a Mystery: September’s Unexplained Events

Tuesday, September 1^st

Markets drop around 2% on high volume, on fears that global stock markets are overpriced and due for pullback during September, historically a losing month for stocks, especially after they’ve risen since March and continue to do so in July and August despite generally declining revenues, earnings, and very mixed news.

Wednesday, September 2^nd

A very odd thing happened: potentially very bad news came out. Predictably, stocks dropped again. Shockingly, gold shot up.

The bad news was the ADP non farms payroll indicated worsening unemployment for the US. Because consumer spending is about 70% of US GDP, and the US remains the world’s largest economy, that is very bad news for US and global recovery hopes. Worse still, the ADP report is a leading indicator of the official US government non farms payroll report that would come out 2 days later on Friday. This was a blow to the weakest link of the recovery.

Yet gold rallied hard, up about 5% from September 2^nd-3^rd. It has since slowed, but neither pulled back nor stopped rising. It didn’t make sense.

Since the crisis began in the summer of 2007, gold has generally gone up with good economic news, and dropped with bad news, since recovery implied inflation, and gold is considered the ultimate inflation hedge. Bad news decreased the chances of inflation, so gold was supposed to drop. Yes, Armageddon-end-of-currency bad news might support gold, but the ADP report was hardly that bad.

Financial writers are paid to explain the markets, so they tried. Common reasons given, however, didn’t make sense. They included:

A weakening dollar: Yes, and the sky is blue, too. Gold and other commodities are priced in dollars, so it makes sense that they would rise as the dollar falls and vice versa. However, the USD and gold have been moving in opposite directions for years. The USD didn’t make any huge moves down when gold took off. This is old news that explains neither the timing nor magnitude of the move.

Concerns About Recovery and Inflation: Huh? This is a contradiction in terms. Less recovery generally means less inflation, not more, because people don’t spend. It’s usually one or the other, but not both (except for rare cases like the ‘70s stagflation, which was due mostly to a rare quadrupling of the price of an external - oil - that both raised prices and killed the economy).Again, except for end-of-world/currency bad news, gold falls with bad economic news, so recovery worries suggest less inflation or even deflation. In recent years, that has caused the USD and other safe haven currencies to rise, and gold to fall.

A “technical” move: A non-explanation. This is what those of us in the analysis business commonly say when we don’t know. Those familiar with technical analysis know that it is a useful tool, but successfully applying it is a much art as science, and there is wide variation as to how it is applied. Was key resistance broken? Key support held? A series of indicators triggered in the bowels of institutional supercomputers? Who knows? Momentum driven trading explains how the move continues, but it doesn’t explain the timing or extent of the move.

So What’s the Meaning of Gold’s Behavior?

So what does this all mean for the average investor?

Background: Why Money Supplies Ballooned

Those familiar with the story of the USD’s travails can skip this part. Those who aren’t, shouldn’t.

Since the current economic crisis began, the supply of every major currency, including the safe haven USD and JPY, has seen unprecedented increase in supply as governments were forced to pump cash into suddenly depleted banking systems and economies to keep banks alive and economies liquid and functioning, as the subprime lending crisis cast doubt on the value of trillions in financial sector assets.

Governments had little choice. If they didn’t, they faced the immediate certainty of another Great Depression from a domino effect of disappearing banks, credit, business, employment and consumer spending slammed each other down into an accelerating tailspin/death spiral/other dramatic metaphor.

So they bailed out banks, and spent on stimulus programs with new cash, paper or electronic. They bought time to fix things and restore confidence. As long as the world remained in depr-err-recession, money supplies could bloat out while scared businesses and consumers would lock down spending until better times arrived.

The problem was that when they did, there was a strong chance that the unprecedentedly large reservoirs of currency would flood into economies and chase a recession- depleted supply of goods, possibly causing unprecedented inflation, aka hyperinflation.

But that was in the future. Meanwhile, hard times would create enough deflationary pressure to keep the floodgates shut.

The Biggest Too-Big-To-Fail: America and the USD

For the USD, the future problem was compounded because there were already vast oceans of accumulated dollars sitting overseas with Asian, European, and Mideast export economies that had diligently saved their export-earned dollars over the years. They held them because they had confidence in the USD’s value.

Even as they saw the US gutting the dollar, and the value of their currency reserves, the exporters’ options were limited. The US dollar and economy remains, for now, the ultimate too-big-to-fail. Complain too loudly, and they’d drive down the value of their own currency reserves, and possible kill off their biggest customer, for which they had no replacement. So they spent this past year alternately whining about the dollar and supporting it, threatening to replace it, while continuing to buy US bonds and affirming its reserve currency status. As long as worldwide recession restrained spending and even threatened inflation, then the inflation threat was somewhere in the future.Thus the USD is part of a very big confidence game in which many have a huge stake, whether they like it or not. The question is, has this become a different kind of “confidence” game?

However, with some signs of actual bottoming, that future may be getting closer. Now what? Central bankers assure us they have the tools to prevent the threatened severe inflation, especially for the most widely held currency, the USD. International intervention has worked before. Many hope it will work again, but many more, especially those managing the funds of exporters must do more than hope.

A No-Confidence Vote in Currencies?

With most expecting a weak recovery over the coming year, stocks do not appear to be the place to park major piles of wealth, and many of the leading exporters like China and the oil exporters are already diversified into industrial commodities. What choice do they have? Currencies or precious metals.

They appear to be choosing gold, and thus also silver, which tends to tag along with gold, at times even exceed it. They are not choosing the usual safe haven currencies: the JPY, USD, and CHF.

In short, the move in gold is at least a tentative no-confidence vote in currencies as a safe haven store of value. Admittedly, the timing of the current move in gold remains a mystery, but, the bigger picture isn’t.

Who is buying? Not clear at this time. That fact by itself suggests exporter central bank or sovereign wealth funds, which often prefer to act through intermediaries for fear of moving markets against themselves because of their sheer size.

Gold may well pull in over the coming months, especially if stocks make their long anticipated pullback.

In the longer term, gold remains well supported by fundamentals on fears of both inflation (if recovery continues) and deep financial crisis (if they don’t) and emerging market buying.

So, What Do You Do?

Currency traders: Long term bias to commodity currencies: long AUD, NZD, CAD, and EUR as a USD hedge, since the EUR tends to move opposite the USD. Short term, beware likelihood of pullback and use it as a buying opportunity. Those preferring ETFs can consider:

RydexShares ETFs: Australian Dollar (FXA), Canadian Dollar (FXC), Euro (FXE), Swedish Krona (FXS)

Wisdom Tree ETFs: New Zealand Dollar BNZ

PowerShares ETFs: Group of 10 Carry Trade (DBV), and U.S. Dollar Bearish (UDN)

Commodity Traders: Long term bias to precious metals.

Stock Traders: Neutral in short term, though we believe there is more to be made playing the downside, from the upper end of multi-month trading ranges.

Income investors: Limit new positions to money not needed in the near term and stick to the commodity or essential service provider stocks we’ve recommended over the past months that pay you in currencies other than US or at least earn in other currencies. We have yet to find a good precious metals income play. Recent suggestions include:

Communications

Cellcom Israel Ltd. (CEL), France Telecom (FTE) Telefonica (TEF)

Canadian Oil/Gas Energy Income Trusts

ARC Energy Trust (OTC: AETUF, TSX: AET-UN), Claymore/SWM Canadian Energy Income Fund (ENY), Enerplus Resources Fund (ERF), Peyto Energy Trust (OTC: PEYUF, TSX: PEY.UN), Provident Energy Trust (PVX, TSX: PVE.UN), Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

Canadian Energy Infrastructure Income Funds

Altagas Income Trust (OTC: ATGFF, TSX: ALA.UN), Pembina Pipeline Fund (OTC: PMBIF, TSX: PIF.UN)

Canadian Utility Income Trusts

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN) and some very positive clarification from their CFO Mr. Patrick Welch, Bell Aliant (OTC: BLIAF, TSX: BA.UN)

Canadian Health Care Income Trust

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Real Estate Income Trusts

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN), Northern Property REIT (OTC: NPRUF, TSX: NPR.UN), RIOCAN REIT: (OTC: RIOCF, TSX: REI.UN

Energy Infrastructure Master Limited Partnerships (MLPs)

Buckeye Partners (BPL), El Paso Pipeline Partners (EPB), Enterprise Products Partners (EPD), Energy Transfer Partners (ETP), Kinder Morgan Energy Partners (KMP), Magellan Midstream Partners (MMP), Nustar Energy (NS), ONEOK Partners (OKS), Sunoco Logistics Partners (SXL), TEPPCO Partners (TPP), Tortoise Energy Infrastructure Partners (TYG)

Coal MLPs

Alliance Resource Partners (ARLP), Northern Resource Partners (NRP), Penn Virginia Resources Partners (PVR)

Other MLPs

Terra Nitrogen Company, L.P. (TNH), StoneMor Partners (STON)

Disclaimer & Disclosure: the opinions expressed are not necessarily those of AVA FX. The author hold positions in the above instruments.

Today’s Best Risk/Reward Income Investments Part 2: Canadian Energy Infrastructure Stocks

2009-08-27T10:37:00.001-07:00

Stocks for the fear AND greed in all of us.

The Problem: Conflicted by Fear and Greed

In the current market, many income investors are feeling very conflicted.

· They are afraid of buying into an overextended rally

· They are also afraid of missing further gains and dividend yields while sitting in cash

In Part 1, we discussed the following Canadian Electric Power stocks: Atlantic Power (ATPWF), Great Lakes Hydro Inc Fund (GLHIF), Innergex Power Income Fund(INRGF), Maxquarie Power & Infrastructure (MCQPF), Northland Power Income Fund (NPIFF). Now we look at the best of the energy infrastructure sector

A Solution: Selected Canadian Energy Infrastructure Stocks for Steady, High Returns

As my regular readers know, I am not a believer in the current rally, yet I hear the pain of conservative income investors who seek yields that are not only safe, but high.

Reward/Risk Overview

Why Buy These Canadian Energy Infrastructure Stocks?

If you must go long, these Canadian Electric Power stocks are all weather stocks that you can feel safe buying even in this volatile market.

· Safety: They sport some of the safest, most reliable dividends to be found, backed by steady revenue streams and sustainable payout ratios. While they can and do suffer

· High yields that keep you ahead of taxes and inflation

· Payment in Canadian dollars, providing a critical element of diversification out of the “Obamanable shrinking US dollar” for those with heavy USD exposure

· Most are relatively green power producers that will benefit from government incentives

Thus when/if the markets pull back, you can afford to sit with these because they pay you very well while you hold them.

Why NOT to Buy Them

They are relatively low risk, but not without risk. Primary risks include

· Overall market risk: Like most stocks, these will fall if the overall stock market pulls back, and there are plenty of reasons to suggest that it will. High valuations compared to earnings, a still deeply weakened US and world economy, continuing job losses that threaten whatever fragile recovery there is, a banking system still on life support, etc.

· Low liquidity: These are thinly traded, and thus tend to drop harder than the overall market.

· Currency Risk: If global markets retreat, the CAD tends to fall against the safe-haven currencies: the JPY, USD, and CHF. Thus those seeking diversification out of the USD would suffer additional losses in currency value in the event of another major stock market decline.

These risks are real. That said, however, we believe the CAD will appreciate further over the long term against the USD. Canada’s banking system largely avoided the subprime mess, sparing Canada the need to expand their money supply (which devalues the currency) on anything like the scale of the US. Also, Canada is the West’s largest source of energy, and supplies other key commodities.

The selections below are not ranked in order of preference. All make excellent investments that will pay you well in all but the most dire conditions, and have continued to pay (and in some cases raise) dividends throughout the current crisis, proving their reliability.

CANADIAN ENERGY INFRASTRUCTURE STOCKS – Our Top Recommendations for Income and Safety

NOTES

ALTAGAS INCOME TRUST

The main criteria for evaluating conservative income stocks are 1) coverage of the distribution with distributable cash flow 2) performance of the major business lines 3) access to credit 4) ability to grow

5) Management’s commitment to sustaining and growing the distribution.

The good news: ATGFF did well on the first three.

Payout ratio was steady at 93%, an acceptable level for a steady revenue business like this.
Continued their expansion program, including
- 1900 megawatts of renewable energy development. It also finalized a contract with NOVA Chemicals to support the expansion of its Harmattan co-stream project with a 20 year, fee based deal
- Management plans for an over 20% increase in capital expenditures for 2009-10, which will be enhanced by recent successful debt and equity offerings, as well as reliable cash flows from the company’s infrastructure in gathering/processing, natural gas, liquids, and power generation.
Additional 8.9% cut in operating costs in Q2
Debt remains very reasonable at 36.1% of capital, below their 45% targeted level

The bad news: ATGFF management intends to reduce distributions from a current CAD$ 2.16 per share to between CAD $1.10-$1.40 (6.5%-8.5% vs. the current approximately 11%) per share when it converts to a corporation, likely around late 2010. It will maintain its current level until then. Their rationale is that it will use the saved capital to fund growth. That’s a disappointingly large cut, but still worthwhile with future growth potential. Given the magnitude of the cut, however, we prefer to wait and buy this one when/if it comes in to the recommended price, in order to bolster the yield.

KEYERA FACILITIES INCOME FUND

Results included:

Gathering & processing income up 10% despite decreased drilling from the worst recession in decades

Natural gas liquids infrastructure net income up 23% on robust demand for fee-based storage and fractionation services

PEMBINA PIPELINE INCOME FUND

Highlights include:

Revenue up 15.2%
Net operating income up 18% due to a doubling of earnings from its oil sands infrastructure, the result of the completion of the Horizon Pipeline system (other new projects in process)
Midstream & Marketing business suffered as a result of falling commodity prices, but that part of the business will get a boost in Q3 from the addition of the Cutback facility, a deal completed this summer.
Management plans to maintain the dividend through 2013-2014, possibly longer (it converts to a corporation in 2011)

Conclusion

In the coming installments of this series, we will present additional ideas for uniquely safe, high yields. Because global markets are highly interrelated at this time, we invite readers to follow our daily and weekly global markets analyses at www.avafx.com/analysis. Give these a few minutes a day, and get a handle on how your investments are being affected by commodity and forex markets.

Disclosure and Disclaimer: The author has positions in the above mentioned instruments.

Today’s Best Risk/Reward Income Investments Part 1: Canadian Power Stocks

2009-08-23T08:47:00.001-07:00

Stocks for the fear AND greed in all of us.

The Problem: Conflicted by Fear and Greed

In the current market, many income investors are feeling very conflicted.

· They are afraid of buying into an overextended rally

· They are also afraid of missing further gains and dividend yields while sitting in cash

A Solution: Selected Canadian Electric Power Stocks for Steady, High Returns

As my regular readers know, I am not a believer in the current rally, yet I hear the pain of conservative income investors who seek yields that are not only safe, but high.

Why Buy These Canadian Power Stocks?

If you must go long, these Canadian Electric Power stocks are all weather stocks that you can feel safe buying even in this volatile market.

· Safety: They sport some of the safest, most reliable dividends to be found, backed by steady revenue streams and sustainable payout ratios. While they can and do suffer

· High yields that keep you ahead of taxes and inflation

· Payment in Canadian dollars, providing a critical element of diversification out of the “Obamanable shrinking US dollar” for those with heavy USD exposure

· Most are relatively green power producers that will benefit from government incentives

Thus when/if the markets pull back, you can afford to sit with these because they pay you very well while you hold them.

Why NOT to Buy Them

They are relatively low risk, but not without risk. Primary risks include

· Low liquidity: These are thinly traded, and thus tend to drop harder than the overall market.

Conclusion

Disclosure and Disclaimer: The views herein expressed are not necessarily those of AVAFX. The author may have positions in the above mentioned instruments.

Safest High Yield Stocks to Buy On the Next Dip

2009-07-30T09:42:00.001-07:00

Part 1: Canadian Apartment Properties REIT (TSX: CAR-U, OTC: CDPYF)

While stocks are overpriced at this time, and that the current rally lacks justification, we also believe that this is the time to be preparing a list of stocks to buy when they pull back. There are many others, but time limits your humble author to just one for now.

Why Stocks are Overvalued

Our reasons include:

The rally was essentially based on bad results beating worse estimates, not any real signs of improving business. Slowing decline does not necessarily mean imminent improvement, especially considering that the fundamental causes of the current crisis have not materially improved. These include:

Declining consumer demand fed by a long term soft job market, declining real wages and hours worked.
A financial sector that is still unable to profit from ongoing operations, and that has been beating low earnings estimates by unsustainable means such as one-time asset sales or high risk trading.

The dollar is likely to lose value over the coming years, and that trend will counteract consumer attempts to save. Why? The dollar is burdened by excessive supply and debt that is likely to inflate and devalue it relative to certain other key currencies and all commodities. Washington has little choice. As Fed Chairman Bernanke told us recently in his testimony before Congress, the US economy will be too weak to withstand withdrawal of stimulus measures until there is job growth. The US is too dependent on consumer spending to sustain a recovery without sustained improvement in consumer incomes.

Why CDPYF Should Be on Your Shopping List

The reasons include:

Solid Performance Under Adverse Conditions

They are actually growing operations despite the worst economic and credit environment in decades.

Posted solid first quarter results, as revenue rose 5.2 percent, net operating income increased 3.4 percent and distributable income moved higher by 2.5 percent.

The balance sheet got stronger as debt interest rose to 2.07 from 1.98 in 2008. In addition, some 95 percent of the mortgages that back the REIT’s properties are federally insured, enabling management to consistently refinance them at a cost lower than conventional mortgages.

Rents rose 2.3 percent and occupancy, though down slightly, was still enviable at 97.3 percent, with a good chunk of the vacancies due to the REIT’s policy of kicking out unreliable tenants.

Strategic Focus on Quality Properties and Regional Diversification

The company has a relentless focus on property and tenant quality, evidenced by its ability to raise rents and avoid hefty bad debt expense.

Another is regional diversification, tempered by a concentration on Canada’s most stable markets. Energy dependent Alberta, for example, contributes only 7 percent of net operating income, while far more stable Ontario is 69 percent. The overall property mix is, therefore, not tied to any particular demographic. Nor is it leveraged to new development, as the REIT’s primary expansion has occurred through acquisitions.

Financial Strength to Exploit Best Future Growth Opportunities

The solid balance sheet, access to low-cost funding, a wide knowledge of Canadian markets and reliable cash flow are all critical strengths for such successful growth. And while tight credit markets and the weak economy have kept growth plans on the conservative side, management is certainly poised and prepared to tack them up a notch or two. Opportunities include the growing demand for upscale senior housing and accommodating wealthy immigrants who continue to come to the country, many from emerging Asia to British Columbia, where the REIT has recently expanded.

High Yield in CAD: The stock yields around 8% and is valued in CAD, a healthier currency than the USD and most other currencies. It's underlying economy is among the healthiest and had not required massive QE that would undermine the CAD's value, it has commodities that the few growing economies need, and it's banks do not require massive bailouts. This is a critical consideration for those lacking CAD exposure

Why Not

Here are the main risks.

Not Immune from Overall Sector Weakness

The increase in portfolio-wide vacancies over the past year is a clear sign Canadian Apartment is by no means immune from economic ups and downs. Weakness has been most pronounced in areas of most recent expansion, such as British Columbia and Alberta. Management’s prior forecast of stabilized rents in those provinces has proven optimistic, as competitors have dropped rents and forced the REIT to come down as well.

In addition, operations in Ontario, which has also seen rising costs such as for increased recycling standards and energy, have also been less profitable. And while high-end apartment rents have generally held steady, lower-end unit rents have been falling. While this REIT focuses on the high end, overall market weakness could ultimately hurt the entire market. Just like subprime foreclosures ultimately also hurt high end home prices, the same overall slack demand could ultimately weaken upper scale rental prices.

A deepening of Canada’s recession could well worsen these trends and cut

more deeply into cash flow.

Very Thin Trading Volume

With a three month average trading volume of under 2000 shares a day (often trading under 1000 shares per day), this one can be volatile, and is not suited for anyone but buy and hold investors who do not need to worry about needing to get out fast.

Conclusion: Rewards Outweigh Risks, But Wait for Market Pullback

Fortunately, things will have to get a lot worse to really threaten the payout, which was covered even in the traditionally weak winter quarter when energy costs can bite hard into apartment REIT profits.

The REIT has also been able to offset some of the overall economy’s

weakness by effectively controlling debt and operating costs, such as energy. That effort could be intensified in coming months, if Ontario regulators act to establish rules allowing a resumption of smart metering growth.

If there is a drawback to owning Canadian Apartment Properties it’s management’s exceptionally conservative approach to its distribution, which hasn’t been increased since November 2003. But at well over 8 percent and safe, it’s far superior to anything on this side of the border.

Better still, these dividends are treated as a qualified dividend in the US as well, a further advantage over its counterparts in Canada, which mostly pay out in ordinary income.

Buy Canadian Apartment Properties REIT for steady, high income and some growth, but only on dips between 10-11 USD per share or less. While shares currently trade above 12, the thin volume can make this one volatile when markets get negative.

Disclosure: The author may hold positions in the above instruments.

Weekly Preview: Key Clues from Global Markets

2009-07-19T12:03:00.000-07:00

Summary

The first week US Q2 earnings reports was good enough to drive global stocks indexes surprisingly high and fast, considering that anything beyond a very superficial glance at the reports shows ominous signs for Q3 and beyond.

Stock indexes have generally led risk appetite, with commodities, commodity based currencies, and higher yielding currencies (which are bought as carry trade volume rises) following stocks up or down, and that correlation held up well over the past week’s rise in major world stock markets.

Thus commodities have moved up over the past week, as have the AUD, NZD, and CAD, while the JPY and USD have dropped. Those currencies in the middle of the yield spectrum have generally showed mixed results, generally gaining against lower yielding currencies and losing ground against higher yielding ones, or just chopping around in a tight trading range.

With international stocks and risk appetite already very close to their highs for the year already, markets appear vulnerable to pullback unless news in the coming weeks, especially earnings reports, can remain very upbeat regarding both results from past quarter and prospects for the future.

For now, support levels for risk assets like stocks, commodities, and risk correlated currencies established over the past few months appear to have more life in them. We suspect resistance may prove equally enduring

Introduction: Review for the Sake of Preview

The short version is that some big name tech stocks and the too-big-to-fail (TBTF) banks and other big name techs managed to beat consensus earnings estimates and spark a rally off of multi-month lows for risk assets like stocks, commodities, and high yielding or commodity based currencies.

As I’ve repeatedly reminded readers, the most decisive earnings announcements for the past two years have come from the financial sector, the root of all major market moves for the past two years.

A Positive Start

Thus the bullish tone for the week was set Monday, before earnings reports even had begun in earnest. The trendsetter, if you will, was influential analyst Meredith Whitney who raised her rating on Goldman Sachs (GS) ahead of its earnings report to Buy from Neutral and took the occasion to suggest that she felt it was possible the financial sector could put together a rally of about 15% in the near-term.

Goldman indeed blew away estimates, and was followed by less dramatic consensus-beating by JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C). Intel and IBM also beat estimates and put a shine on the tech sector, and brought additional cheer to the Asian stock markets, because so much electronics manufacturing is done there.

Denial—Not Just a River in Egypt

Nonetheless, even a casual study of the details behind the financial sector announcements reveals a far more disturbing picture, for none of the heralded profits reflected results from any kind of predictable ongoing operations.

Goldman Sachs’ (GS) profits were primarily from high risk trading operations, which by nature can vary dramatically, especially with the recent theft of proprietary short term trading software. This business model is perhaps reckless but understandable, given that GS knows it can always hit the taxpayers to cover losses, but is worrisome for the markets, never mind American taxpayers.

Strong results from JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C) came from one-time capital gains from asset sales, not sustainable operations. While JPM did have strong results from its commercial banking and asset management business, it noted declines in other key areas of operations and increasing defaults and credit risk. The rest showed profits mostly due to capital gains, not sustainable ongoing operations, and also noted rising default rates and risks of much more to come. Indeed Citigroup shows a loss if you factor out its sale of Smith Barney to Morgan Stanley (MS).

If you think this is bad, just wait. Consider that current conditions are relatively good compared to what’s coming. To give the banks a chance to earn more than they lose, Washington has thus far:

Allowed banks to borrow for next to nothing, lend out at far higher rates
Allowed banks to overvalue assets
Keep consumer interest rates relatively low in order to encourage spending and fee-generating mortgage refinancing

How careful will the big banks be in lending this money, knowing that if the past is any guide, any bad loans will be offloaded onto the taxpayers? There will be plenty more bad loans. Loan losses can only grow as unemployment rises, even if the rate of job losses declines. Bank stress test worse case scenarios were for 8.9% unemployment in 2009, and it’s already at 9.5% and rising.

However, the true state of the banks is fodder for a long article of its own, so let’s leave it for now.

The point is, as long as the financial sector remains the driver of global stocks, which in turn drive commodities and currencies, and the fundamental longer term outlook for the financial sector continues to worsen, what kind of longer term picture for world markets can we foresee?

Moving beyond the banks, there was abundant that in fact the overall earnings picture at this point is in fact the initial earnings picture is at best mixed. Consider some big name announcements from firms that actually make and export things and employ lots of people.

General Electric (GE) reported revenues down 17%, another double digit dip that is an especially disturbing sign about the global economy given GE’s global presence
Harley Davidson (HOG) reported a drop of 30% fewer units shipped annually

Note that ultimately, stocks are priced on earnings growth, typically price to earnings (PE) or price to anticipated earnings growth (PEG). If overall earnings are declining significantly then the picture for stocks and risk assets is grim and suggests more downside than upside.

Looking beyond earnings, at numbers that are harder to manipulate, we see a similar picture

The Port of Long Beach shows container shipments down nearly 30% annually
Freight railroad car loadings are down 25% annually, as reflected in CSX’s report.
Tax receipts, both personal and corporate, have plummeted

While economic data this past week was secondary to earnings, it too showed mixed results at best, with both core retail sales and industrial production weak, which does not bode well for the coming GDP estimates.

In sum, it appears that this past week’s rally should be viewed with at least as much suspicion as relief, especially with stocks already so close to their 2009 highs, with no more real evidence of recovery than we had before the rally. With risk assets tracking movements in stocks, and stocks already appearing to price in a recovery within the next year, it will take some very good news to get stocks and risk assets to sustain a drive above the past months’ resistance levels.

Admittedly, one could argue the past week’s rally on less than decisive evidence suggests that markets are in a mood to rally and will do so given any pretext. Overall, however the better bet seems to be on the June highs holding firm.

Conclusions for Equities

For traders, with stocks already near highs and plenty of bad news for short sellers to latch onto be ready to play the short side. Longer term investors should be preparing their lists of buy targets if / when stocks tumble.

Key Forex Trading Info for the Coming Week

USD
With equities nearing multi-month highs and resistance, safe haven currencies like the USD (as well as the JPY and CHF) are closer to support levels and may well see a bounce if equities pull back. As analyst Kathy Lien notes, the EUR/USD has had an 82% positive correlation with the USD since January, and a 91% correlation since last week.

With almost 100 companies reporting next week (including financial heavyweights Morgan Stanley and Wells Fargo, the correlation is likely to hold, so currency traders will be watching the S&P.

The coming week’s economic calendar is relatively quiet for the Dollar, however Federal Reserve Chairman Ben Bernanke’s semi-annual testimony on Tuesday and Wednesday could spark some volatility because he’s expected discuss economic and monetary policy going forward, including giving some indication about how he plans to exit the massive stimulus program without igniting an inflationary steep rise in interest rates.

Given Fed forecasts and his own recent remarks, he rightly fears a jobless recovery. However, if he indicates that the recovery is still too weak to consider a deadline for the stimulus programs, he could undermine the ongoing optimism and belief in the improved growth forecasts. If he suggests that a winding down has already begun, that could have the opposite effect. If he discusses means of exit without a date, it’s unclear if there will be any rally in the USD.

Leading indicators, jobless claims, existing home sales and revisions to the University of Michigan Consumer Confidence survey are the only U.S. data on the calendar next week. Although these reports will confirm or deny the improvements that we have witnessed in the U.S. labor and housing markets, they are not significant enough to shift market sentiment. If USD moves, the impetus is likely to come from the emerging positive or negative theme of Q2 earnings and Q3 guidance.

EUR/USD

The pair has been trading in a tight range for the past months, for lack of any decisive news. Look to earnings or Bernanke’s testimony for some potential movement, also we have German producer prices on Monday, current account data on Thursday, followed by the German IFO and PMI reports on Friday.

GBP/USD

It’s unclear how to read the GBP. There have been signs decreasing contraction, primarily in the labor market and service sector. Earlier this week, the U.K. reported the smallest increase in jobless claims in 12 months. However their aggressive stimulus programs including Quantitative Easing (QE) have caused concern. The IMF has warned that if the U.K. doesn’t rein in the national debt and propose a plan to rapidly improve public finances, there could be a run on the British pound. At the same time, the market actually expects the Bank of England to boost their asset purchase programs. Next week’s economic reports will tell us whether that would be really necessary to ensure the recovery stays on track. Retail sales, second quarter GDP and the minutes from the most recent Bank of England meeting are due for release. Traders will be studying these notes for indications about further QE, if any.

USD/CAD

The CAD has been the best performing currency this past week despite mostly soft economic data. Oil rose to $63 a barrel and its expected ascent is the primary reason why the uptrend in the CAD has been so strong. There have been indications of deflation strong enough to trigger speculation that the Bank of Canada, while expected for now to leave interest rates unchanged, may feel compelled soon to initiate their Quantitative Easing program. The recent strength of the Canadian dollar spells big trouble for exporters, and Canada has already repeatedly expressed its concern about this, sparking suspicions of central bank intervention. As we’ve seen with the Swiss, recently, the mere possibility of such moves can be enough to drive the currency down.

AUD & NZD
The value of Australian exports plunged by the fastest rate in 25 years on lower commodity prices and a higher currency. New Zealand’s Home Prices declined to the lowest level in almost two years in Q1 as the housing market continues to be the “Achilles heel” of the country’s recovery. Economic releases during the next week are scarce for both Australia and New Zealand. Thus any movements in these would likely come from external sources, particularly a sharp mood change emanating from US earnings reports and rippling through global markets.

JPY

The USD/JPY has dropped and is approaching a 5 month low around 92, which will hurt Japan’s already struggling exports. Continued news of political turmoil may weaken the Yen. For next week, we can expect the BoJ Monetary Meeting Board Minutes on Monday and the Trade Balance on Wednesday. More good vibes from Wall Street could also ease the Yen back down on increasing sales from risk seeking carry traders.

Commodities

These have generally also tracked stocks, which are now even more influential with US earnings season. US weekly inventory data may have some influence, but tends to get overshadowed by earnings. Gold should continue to move with perceived inflation prospects.

Weekly Preview: Key Clues from Global Markets-Part II

2009-07-12T05:01:00.001-07:00

JPY Likely to Strengthen as Risk Appetite Continues to Fade

Summary

Fundamental Outlook for Japanese Yen: Bullish

Merchant Sentiment at highest in almost 3 years
Annual Corporate Good prices make record drop
Current Account Surplus Grows even while imports drop almost 44%.
Japanese Trade Surplus Widens as Imports Sputter

The Yen and US Dollar: Compare and Contrast

Like the USD, the near term fortunes of the JPY will depend mostly risk appetite, not underlying fundamentals for the Japanese economy. Thus the more gloom for everything else, the more these two tend to rise.
That’s good news for both currencies, because both economies are struggling
Given the relatively lower debt and QE levels weighing on the Yen, the Yen appears to be considered far safer than the #2 safest USD.

The Japanese Yen looks likely to advance in the week ahead as risky assets reverse lower, prompting liquidation of carry trades funded in the perennially low-yielding currency. Earnings season is upon us, and stocks look increasingly shaky having ended June trading at the highest level relative to earnings since 2004, a year when the world economy grew 4.1% in real terms.

The OECD, IMF, World Bank, and all major central banks are in agreement that the world economy will shrink this year, suggesting the markets have been more than a little overzealous and need only a little nudge from some disappointing second-quarter profit figures to topple over. Stand-by yield-seeking trades like GBPJPY and all of the Japanese unit’s pairings with commodity-linked currencies are on average over 91% correlated with the MSCI World Stock Index, meaning that any return to risk aversion is likely prompt sharp carry-trade liquidation and boost the Yen.
The economic calendar’s the modest helping of scheduled releases is unlikely to provoke much of a reaction from the market considering traders have probably priced in the underlying themes behind the likely data outcomes long ago. Consumer confidence will likely tick up for the sixth consecutive month in June, mirroring recent improvements in the Eco Watchers and Tankan Survey measures of merchant and business sentiment as the government’s record-breaking 25 trillion yen fiscal package continues to work its way into the broad economy.

The main question going forward is whether such improvements are sustainable after the flow of stimulus cash dries up. The Bank of Japan seems pessimistic on this front, noting that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” Indeed, the jobless rate rose to the highest in over 5 years in May as the economy shed 440k jobs.

Still, near-term stabilization is delays the need for further monetary expansion, bringing Japan closer to an eventual recovery in overseas demand that will ultimately feed a rebound in the world’s second-largest economy. This means the upcoming monetary policy announcement is likely to be a non-event once more, with Maasaki Shirakawa and company saving any ammunition they may still have until they really need to use it.

GBP Gets Near Term Boost from BoE Decision to Abstain from Further QE

Summary

Outlook for British Pound: Bearish

BoE holds rates at 0.50%, announces will not expand asset purchase program for now
Industrial activity falls for the 20^th month in the past 24
Consumer confidence hits 8 month high, despite last week’s report that UK Q1 GDP fell 2.4%, revised lower from -1.9%

Potential Key News to Move the GBP Markets

Tuesday Annual CPI, Annual BRC Retail Sales, RICS House Price Balance

Wednesday Claimant Count Change (change in those claiming unemployment )

As GBPUSD exemplifies, the British pound was little moved against most of its major counterparts this past week. This is quiet was somewhat unexpected considering the presence of the Bank of England’s rate decision and the G8 meeting. Since both events seem to have had surprisingly little immediate impact on the sterling, it seems that trading will lack any clear trend without a strong enough catalyst to put the market in motion. There are a few notable economic releases over the coming week; but should we really expect them to finally force a breakout from GBPUSD and other range-bound sterling crosses?
Looking at the economic docket, it seems relatively light on market movers; but there is certainly fuel in the few indicators that populate the calendar. It is clear from a quick scan of the listing that event risk is heavily loaded to the front half of the week; and the last round of data due Wednesday is arguably the most influential.

Similar to the US, Britain is more dependent on consumer spending and services employment, and less so on exports. Thus employment is a critical factor in the United Kingdom’s eventual recovery from its worst recession since WWII. Market commentators often point to a rebound in credit activity and turn around in the housing sector as key steps to facilitating a broader economic recovery. However, both of these dynamics are dependent upon the health of the consumer, who requires both the means and confidence to put their money back into the economy and financial system.

Employment is critical to both nationwide wealth and sentiment; yet the trend is hardly an encouraging sign of recovery. Through May, unemployment levels hit their highest levels since 1996, and, forecasts for jobless claims suggest this metric is expected to grow. Another 40,000-plus contraction in payrolls would mark the 16th consecutive monthly contraction and no doubt push the 7.2 percent unemployment rate measured over the quarter through April higher.
Other releases for the week include two housing indicators. The DCLG price indicator is a lagging figure; but the RICS House Price Balance is a well-respected leading report. Economists are expecting this indicator to tick higher for the ninth consecutive month; but it is important to remember that the gauge has kept the housing sector deep underwater and has done so for nearly two years now. Retail sales on the other hand, measured by the BRC, have shown a positive shift recently Though this is a proprietary gauge, it in some ways has greater clout as a consumer spending indicator than even the governments own retail sales report. Finally, the June inflation numbers will factor into monetary policy officials forecasts. Both deflation and rampant inflation would create major problems for navigating an economic recovery; and central bankers the world over are crossing their fingers that neither scenario develops.
This laundry list of indicators offers some foresight into where volatility may spring up; but for sterling traders, the real risk is risk appetite. THAT is still the primary threat to the pound. The economy is still considered among most market participants to be the worst positioned, advanced economy.

While a drop in confidence that a global rebound is imminent will do little to further degrade the UK’s position; a boost in optimism would certain leverage the sentiment surrounding the country. It is important to recall that this past week’s G8 meeting acknowledged the globe is showing tentative signs of economic improvement; but that conditions still warrant a focus on fiscal positions. With the United Kingdom already overextending itself in stimulus and aid, a call for all advanced economies to focus on recapitalizing banks and working off distressed debt means the second largest European economy won’t to have to shoulder a greater portion of the burden. Taken a step further, the BoE’s decision to hold QE at 125bln may signal the worst is past.

Commodities and Equities

Summary

As noted in the first section above, these will move together with sentiment on the recovery. The past month’s stagnation of global stock markets, and an overall negative theme to the past two weeks, including:

World Bank downgrade of economic growth forecasts
OECD’s mildly more upbeat outlook based on a more optimistic view of the US, which is proving wrong, as shown by Thursday’s nasty picture of the US jobs and average hourly wage and hours situation, which will further batter consumer spending and ultimately the critical financial sector

The rising pessimism suggests

Near term drop in industrial and agricultural commodities prices
Lower earnings and thus stock prices
Possible near term deflation , with inflation expected as things improve, especially with the unprecedented flood of new fiat bills in all major currencies and thus long term rising demand for precious metals and other hard assets as an inflation hedge

Time to Get Crude?

Range trading does not mean lack of volatility or chances to make fast money with relatively low risk. Crude recently broken $60 support, a level not visited since mid-May. It has fallen about 18% since its June 29 high. At 100:1 leverage, that can be a nearly 1800% profit if you catch most of the move. After earnings season we should have a better picture of crude’s direction. Given its recent past, we’ve seen how it can make multi-day moves in which traders can get in after the first 2 days and still catch a good chunk of the short term move.

Conclusion: So What Should An Investor Do?

Stock markets tend to be the best barometers of recovery sentiment. Thus:

1. If equity indexes rise, expect commodities and higher risk currencies and commodity currencies [AUD, NZD, CAD] related stocks to perform better against the safer currencies, the JPY and USD.

2. Expect the opposite if they fall.

Thus traders to go long the first group if the overall economic picture looks better, and short these assets if things look worse, The likely beneficiaries of further pessimism would be short positions of the first group, and long positions in the USD and JPY.

3. If stock markets come in to test March lows, that could provide an opportunity for investors,

especially buy and hold income investors, to begin taking long positions in stocks with the criteria we’ve recommended over the past half year. That is, stocks that produce a reliable dividend of over 7% tied to a diverse basket of currencies, commodities, and other hard assets.

In the longer term, as economies eventually do recover, inflation is likely to be the big concern, which would favor assets linked to commodities, other hard assets, and the currencies with the least debt and oversupply. See prior articles from May and earlier.

Just for a quick reminder consider a few of the following to place orders near November or March lows:

For more short term downside risk as energy prices pull in but more long term appreciation in price and dividend growth (though still yielding 8-9%+ even at current prices)

Enerplus Resources Fund (ERF)

Vermillion Energy Trust (OTC: VETMF, TSX: VET.UN)

For more stable yields, consider these green power producers (yielding 8-13%)

Atlantic Power Corporation (OTC: ATPWF, TSX: ATP.UN)

Energy Savings Income Fund (OTC: ESIUF, TSX: SIF.UN)

Great Lakes Hydro Income Fund (OTC: GLHIF, TSX: GLH.UN)

Innergex Power Income Fund (OTC: INRGF, TSX: IEF.UN)

Macquarie Power & Infrastructure (OTC: MCQPF, TSX: MPT.UN)

Northland Power Income Fund (OTC: NPIFF, TSX: NPI-U)

See prior articles for other high yielders with stable dividends like

CML Healthcare Inc. Fund (OTC: CMHIF, TSX: CLC.UN)

Canadian Apartment Properties REIT (OTC: CDPYF, TSX: CAR.UN)

Northern Property REIT (OTC: NPRUF, TSX: NPR.UN)

Disclosure

I have positions in most of the above mentioned investments.

Disclaimer

The views of the author are not necessarily those of AVAFX

Weekly Preview: Key Clues from Global Forex, Commodities, Stock Indexes --Part I

2009-07-12T04:59:00.001-07:00

Background

Before June 22^nd’s employment data, there were many who could still see global markets heading higher. For the near term, that opinion now appears out of favor. The debate is now whether markets will continue their mostly horizontal tight trading ranges of the past month or more, or if their retreat from May’s highs will now prove to be the beginning of a new down trend to test support levels.

For those who missed the fireworks, here’s a recap.

Is July the Turning Point? Or Just Another Move Down Within Price Channels?

Markets were nervous on Thursday before the Non-Farms Payrolls report came out, with Asian, and European stocks already solidly down on Thursday before the report came out. The results confirmed the fear.

Context Is Everything

To understand the impact the July 2^nd NFP employment data had, consider the context.

News over the last weeks of June had been mixed and markets were waiting for an important indicator like the monthly US NFP results.
Major World Stock Markets were typically sitting on gains of 20-30% since the rally began March 3^rd from surprisingly good Q1 US financial results. Yet in fact there had been little fundamental data to suggest that employment, GDP, earnings, or any other meaningful measure of improvement would show similar gains over the coming year. Thus in June most global equity, commodity, and currency markets reflected this concern by trading in tight horizontal channels awaiting news to clarify if the growth already priced in with the current rally was really coming. Confidence in the rally was fading, markets were nervous.

During these final weeks of June, the biggest news (and biggest drop in most global markets) came when the World Bank announced downwardly revised estimates for even greater global economic contraction. Markets recovered from the drop, due to no small degree to a more optimistic picture from the OECD that served to balance the World Bank’s more pessimistic outlook. However, the very basis for the OECD forecast was a more optimistic view of US growth, which it believed would outweigh a worsening situation in other regions. Thus the NFP report struck at the foundation of the OECD's view, undermined it, possibly leading traders to conclude the World Bank was right and that real recovery( in the US or elsewhere) is not coming soon, and that growth related assets were likely to fall in value.

Unemployment is Key for the US

In short, the NFP report served to tip sentiment firmly negative, furthering the belief that recovery would not be as soon or as strong as hoped. With about 70% of US GDP coming from consumer spending, the NFP report hit expectations for the US especially hard, since

· Worsening employment directly undermines consumer spending. Not only were more jobs lost than expected, but average hourly wages were flat and average hours worked declined. Thus even the US worker/consumer who still has a job is earning less.

· Bank stress tests’ worst cast unemployment for 2009 was 8.9%, and it’s now at 9.5% with no strong sign of slowing. More unemployment means more deterioration in bank mortgage and credit card portfolio valuations, more defaults, more need for additional bailouts.

· Mortgage rate resets are coming in waves in 2010-11, and will result in much higher mortgage payments, further increasing the default rate for a poorer US homeowner and further weakening the banks.

Remember, news about the health of the US financial sector has been the root of all major market moves over the past two years since the current crisis began.

The news really was bad. The U.S lost 467K jobs in May, about 29% more than the 363K forecasted and 45% above April’s surprisingly small (at least in today’s market) loss of only 322K jobs. This report, issued at the beginning of June, had fed hopes that the worst might be over, and kept world stock and commodity markets mostly, trading in a horizontal range near their highs for the year, awaiting further news to justify the 20-30% gains in stocks since the beginning of March and nearly 100% gain in crude oil since 2009 began.

This report dashed those hopes, causing a predictable sell off in US trading on Thursday in “risk-appetite” assets that appreciate with optimism about the world economy stocks, commodities, and higher risk currencies (the AUD, NZD). Safe haven assets, particularly the JPY, USD, and CHF currencies rose against other currencies deemed riskier.

Since Tuesday July 7^th, most markets have settled into tight trading ranges

Big Themes For the Coming Week

The S&P remains the key market to watch

It’s the best single best indicator of global stock markets, which are the best indicator of fear/pessimism, which is what drives commodity and currency markets.

Note the correlations between the daily S&P chart, that of other major international stock indexes, and those of a few representative currency and commodity. Note the moves on July 2^nd (when the US NFP data was released, sparking the recent sell off) and beyond, and how well they correlate.

Comparison of Daily Stock Index Movements with Representative Commodity and Currency Markets

Q2 earnings season is now in full swing, and perhaps the most important news that could move the USD, and the markets, will be Q2 results from the financial sector, especially from the 20 largest institutions that Washington won’t let fail. Again, this sector has been the root of both the market collapses and rallies, and surprises from Wall Street could easily outweigh other events this week. Their fundamentals are, if anything, eroding along with US jobs and spending.

However, will this weakening show up yet? Many, such as noted economist Nuriel Roubini, believe the banks may be able to somehow exploit laxer accounting rules to present a decent picture for the next quarter or so. However, there are too many potential time bombs due to go off in the next 2-4 quarters to really believe the nasty news is still to come for the banks, and thus, for all global markets awaiting recovery.

Thus if an overall positive or negative theme emerges from Q2 earnings, especially financial earnings, THAT could easily be THE market moving news of the week.

Ramifications

Thus the rally in world “risk assets” like stocks, commodities, and riskier currencies like the AUD and NZD may indeed still be well ahead of world growth prospects, and thus vulnerable to pullback. Resulting risk-aversion would be likely to include:

Gains by safe-haven currencies (JPY, USD, CHF) against riskier and commodity-based export currencies (AUD, NZD, CAD)
Downward pressure on commodities, and stocks, either in the form of an outright downtrend, or continued trading in the current ranges established over the past 4-8 weeks, with risk assets approaching or testing support levels, and safe haven assets like USD, JPY, and CHF currencies moving in the opposite direction
If March lows tested in global stocks, possible long opportunities, especially for buy and hold income stock investors

US Dollar: Declining Risk Appetite Favors It Against Riskier Currencies, Now Awaiting Next Big News, Probably from Q2 Earnings, Especially Financial Sector Earnings Coming This Week

Overall USD Outlook for the Coming Week: Neutral

Risk Appetite Has Been the Key Factor in Currency Markets, So Rising Fear Could Boost the USD Toward Its Upper Range Against Riskier Currencies, however its steep drop against the JPY appears overdone.

Summary & Potential Market Movers for the USD

Overall USD Outlook: Neutral – But More Fear Could Well Boost the USD

IMF upgrades its forecast for the US, downgrades most of the world including Euro zone and Britain, but upgrades Japan, Canada
Consumer confidence declines for first time in 5 months
G8 avoids talk about replacing USD as reserve currency
Biggest news this week for the USD: The overall theme of US Q2 Earnings, especially financial sector earnings. Also: Tuesday’s monthly Core Retails Sales, Wednesday’s Core PPI and FOMC minutes, Thursday’s TIC Long-Term Purchases, Friday’s New Building Permits

USD Has Been Moving on Fear, Not Fundamentals, Awaits the Next Big News

Risk aversion, certainly not fundamentals, has made the USD one of the the strongest of the majors in the past weeks. In May there were those who questioned whether the dollar was still seen as a safe haven. Both the World Bank downgrading of world economic growth and the recent US jobs data driven market drops have reaffirmed the USD’s safe haven status. This past week’s IMF report revised its forecast upward for the US (less contraction), which these days passes for a good report.

For the later part of the past week, the markets seemed to have digested the increased fear levels and the dollar has mostly settled into a tight trading range against other majors, and is likely to begin the week that way as currency markets await the next big news that moves the prevailing fear level up or down.

The big exception may continue to be the USD/JPY which has been diving without any clear reason. Some propose a combination of factors has converged to drive the pair down, such as narrowing interest rate spreads between US and Japanese government bonds, concern about Japanese exporters dumping dollar holdings, etc. However, in the end this is all speculation and thus, lacking any evidence otherwise, we must assume it is an over-reaction vulnerable to correction. Those continuing to sell this pair should proceed with caution, since such steep declines as seen with this pair don’t tend to last.

However, given the worsening employment and wage picture, the longer term picture for the USD is worrisome, since fewer jobs and lower earnings means less consumer spending, which is about 70% of the US GDP. Of course that means lower exports to the US for the rest of the world’s economies, which would also weigh on their currencies. Thus the dollar need only be the least ugly currency of the bunch to be the strongest.

It’s also a major problem for the US banks, as poorer consumers mean declining value for both residential and commercial mortgage portfolios. The bank stress tests assumed a worst case 8.9% for 2009, and we’re already officially well above that at 9.5%. The real figure could easily be far worse, due to the way US employment data is gathered.

Q2 earnings season is now in full swing, and perhaps the most important news that could move the USD, and the markets, will be Q2 results from the financial sector, especially the 20 largest or so that Washington won’t let fail. Again, this sector has been the root of both the market collapses and rallies, and surprises from Wall Street could easily outweigh other events this week.

Euro Likely to Remain in Tight Trading Range Barring Breakdown in Stocks

Summary

Overall Euro Outlook: Bearish

Emerging overall theme from US Q2 earnings, especially from banks, may be the biggest influence
Euro bounces on financial risk sentiment, German Trade Balance data
German Industrial Production gains most in 16 years

A relatively busy economic calendar in the week ahead suggests we can expect a pickup in intraday price moves, but low volatility expectations give little scope for a sustained EURUSD breakout.

Potential Market Movers for the EUR

News that might move the pair this week includes:

Tuesday’s German ZEW institutional investor sentiment
Tuesday’s Euro-Zone Industrial Production

· While there is potentially market moving news on the calendar, the recent past shows that if there is news that moves the S&P, could outweigh all others.

The recent downturn in global financial and economic sentiment suggests that future outlook for business conditions may have suffered through the month of July, and there are noteworthy downside risks to consensus forecasts. Ditto the Euro Zone Industrial Production numbers.
Recently published German Industrial Production reports showed that output grew at its fastest in 16 years in the month of May, and similarly robust figures out of France boosted forecasts for upcoming Euro Zone data. Consensus forecasts now call for a noteworthy 1.5 percent month-on-month gain in European industrial output—a welcome sign of hope for the industrial sectors. Substantial declines in consumer demand have meant that spending has fallen by record amounts across the Euro Zone, and highly export-dependent countries such as Germany have felt the pinch. We will need to see upcoming Industrial Production numbers impress to keep hopes of sustained recovery alive. And though Euro Zone Industrial Production figures have not historically produced major EURUSD volatility, traders should be on the lookout for any post-event reactions on the data.
It will otherwise remain important to monitor trends in broader financial markets—especially the US S&P 500, which fell near its lowest levels in over two months, causing a by now predictable drop in the Euro, this time by nearly four percent against the Japanese Yen, on flight-to-safety flows. Similar flare-ups in market tensions could once again drive EURJPY price moves, but note that the Euro has held firm against the US Dollar.
Last week commentators noted that forex options markets pointed to limited Euro/US Dollar volatility expectations and suggested that the EURUSD would remain stuck in its recent range. Flare-ups in financial market tensions leave 1-week Implied Volatility levels on EURUSD options marginally higher on the week, but we doubt that these point to a Euro breakout. Given such an environment, we may have to wait until a material shift in financial market sentiment before calling for extended EURUSD moves. Until then, expect the Euro to remain choppy within a wide trading range against the US Dollar.

To be continued in Part II

Disclosure

I have positions in most of the above mentioned investments.

Disclaimer

The views of the author are not necessarily those of AVAFX

WorldMarketsGuide Preview: Stocks Officially Downtrend, Forex, Commodities Follow--How Long?

2009-07-08T06:41:00.000-07:00

(As of approximately 13:00 GMT Wednesday, 9:00 am EST)

Summary

S&P, other major world stock indexes make third "lower-high-lower-low" to officially form a new down trends.

Forex, commodity markets continue to follow stocks, fall also. However, safe-haven currency pairs begin up trends.

Introduction

While there is debate over what precise criteria define a trend, most would agree that a sequence of three lower highs and lower lows on a daily chart can be called a down trend. Tuesday's trading on the daily candlestick chart of almost any major stock market shows the same basic picture, a significant drop over 1% that makes the third lower high and lower low, creating a downward sloping trading channel.

Until yesterday, almost every stock, commodity, and currency market was in a horizontal trading channel for the past 4-6 weeks (depending on the instrument clearly they were approaching and testing support. The question was whether support would hold and the drift down was just part of a continued oscillation within a flat trading tunnel. The question now appears answered.

There were exceptions.

Crude oil, remained among the most volatile instruments of the year, was already in a clear downtrend and hitting lows not seen in nearly 7 weeks.

Currency pairs with a clearly safer "base currency" (i.e. currency in the numerator or to the left of the "/" line) were rising towards the upper end of their channel. The JPY is considered the safest currency, followed by the USD, then the CHF.

Global Stock Indexes

The short version: down, mostly 1%-2.3%, forming a sequence of 3 recent lower-highs-and-lower-lows. Thus global stocks have moved from a horizontal trading channel to a downward sloping channel that breaks below 4-6 week support, as illustrated below.

This move is very significant, because it signaled, as it usually has in the past few years, similar moves in commodities and currencies, except for the safe-haven currency pairs. Why?

Stock Indexes Have Generally Lead Commodity and Currency Markets

The driving force behind most markets, certainly over the past few years, has been trader sentiment or expectations about the state of regional and world economic growth prospects. As optimism rises, stocks, commodities, and higher yielding currencies generally rise in price on the assumption of increasing economic activity, demand for commodities, goods, and services, and rising corporate earnings. When economic prospects look gloomier, the opposite happens, and markets fall.

Global stock markets have generally been the leading, clearest indicator of these expectations, with currency and commodity markets usually responding to stock market movements rather than the other way around (with exceptions, of course).

Moreover, given the highly related nature of global stock markets, these markets very often move together, and even more often trend together over time. Thus stock indexes have often been the leading indicator of not only what happens with currencies and commodities, but also of how markets that open later in the day will at least begin their trading, if not follow the same direction.

Note the correlations in the below illustration showing how futures markets for these instruments closed at the end of the trading day GMT (that is, they continue trading in Asia and Europe even after the actual stock markets have closed. The trading day begins in Asia, represented in the upper left by the Japan's Nikkei stock index futures daily chart with July 2nd highlighted. Then Europe opens, here represented below the Nikkei chart by the German Dax 30 stock index futures daily chart. The last major markets of the day are in the Americas, as represented on the bottom left by the S&P 500 stock index futures daily chart. On the top right is crude oil, below which is the AUD/JPY and AUD/USD currency pairs.

Remember that on July 2nd markets waited for the main economic event of the week, US non-farms payrolls report. Uncertain and nervous, traders were taking profits, thus Asia had already closed down, and Europe was also down generally over 2%. The very disappointing NFP results drove the US and Europe down hard.

As the world's largest economy, a recovering US is essential for a global recovery. The World Bank had already downgraded its world economic forecast on June 22 (the prior large decline) but the OECD had issued a more optimistic view based on a more positive view of the US economy's recovery. The poor NFP numbers may have undermined the OECD report. Thus after a month of mixed news, pessimism took over and stocks continued to drop.

Note how the charts on the right side move roughly in step with the mood as reflected in the stock indexes from July 2nd onward. On the top right is crude oil, one of the most volatile commodities recently. Below are charts of the AUD, considered one of the riskiest currencies, as the base currency, against the USD, then JPY (the safe haven currencies) as the cross currencies.

Note how all have moved together.

Comparison of Daily Stock Index Movements with Representative Commodity and Currency Markets

This synchronization between global stock indexes with commodities and currencies has usually held up over the past few years regarding short term movements. Exceptions do exist. For example, a major long term spike up in crude prices could scare stocks into decline as their costs would rise and consumers would have less to spend after paying for essential energy needs.

Thus stocks and other markets have mostly broken below 4-6 week support, and are now in what seem to be at least near term down trends.

The Next Big Question

Now that the 4-6 week flat trading channels appear to have broken down, the question is how long the current down move will last.

Will the next levels of support hold and form a new, wider horizontal trading range, or are markets headed back to test November or even March lows?

Currencies

If the above is clear, then you know how currencies have generally behaved. Most have behaved according to the ideas illustrated in the above chart comparison. Pairs with safer base currencies compared to their cross currency have generally gone up, while those with riskier base currencies have dropped, as shown above with the AUD charts.

Exceptions do exist, especially when the difference in risk level is not so clear. For example, a look at a daily chart of the USD/CHF shows the pair still in a tight trading range. Both are considered safer currencies.

The recent trend since July 2nd's NFP report inspired fear-fest shows the market still considers the USD slightly safer, though it's debatable which is actually safer.

USD/CHF Daily Chart: USD moving up but still within 4 week horizontal range

Remember, market perceptions do not always coincide with reality (how's that for understatement?)

For example, if you look at a USD/CAD chart, you'll see the USD had been steadily rising against the CAD for over a month as the global stock rally stalled on waning optimism. This suggests the markets consider the USD safer. Is it? The Canadian financial and housing sectors are in much better shape, having avoided most of the sub-prime fiasco. Yes, Canada is an export based economy that depends on the US for most of it's sales, but that doesn't make it worse off than the US. The oil, gas, metals, grain, and other commodities can be sent elsewhere, especially if Chinese and Indian growth are as expected.

Commodities

Similarly, while most commodities are down-trending, there are those that are holding on to their 4-6 week ranges. Note the below chart.

Gold Daily Chart: Still in Recent Horizontal Price Channel

Conclusion

Thus there are trends for trend traders, and horizontal ranges for those preferring that kind of situation. Of course, plenty of movement in crude.

As noted before, the next big news will be earnings, especially those from the financial sector, which have been the root of all major sentiment shifts and thus market moves in the past two years. These begin today in earnest, but the bank earnings will be coming next week.

Do we have any hints? None really, however note that the surprisingly positive Q1 bank earnings were leaked early, as Team Washington & Wall Street sought to get the positive feelings out as fast as possible in order to stabilize markets that were at multi-year lows. Would a lack of such leaks before the bank earnings announcements suggest the opposite news is coming?

If so, the recent slide may appear modest indeed.

Disclaimer: Opinions herein stated are those of the author and do not necessarily reflect those of AVAFX.

Disclosure: The author may have positions in the above instruments.

Weekly Preview: Key Clues from Global Forex, Commodities, Stock Indexes

2009-07-05T05:35:00.001-07:00

Background

Before Thursday’s U.S. employment data, there were many who could still see global markets heading higher. For the near term, that opinion now appears out of favor. The debate is now whether markets will continue their mostly horizontal tight trading ranges of the past month or more, or if their retreat from May’s highs will now prove to be the beginning of a new down trend to test support levels.

For those who missed the fireworks, here’s a recap.

Most Markets (Risk Assets) Rise Through May, Consolidate in June

Having spent most of the year rising, global forex, commodity, and stock markets stopped rising and spent June in tight trading ranges, reflecting uncertainty about whether the gains thus far were justified by the very mixed fundamental evidence that employment, earnings, GDP, or any other major measure of growth would in fact show similar growth within the coming year. The next big clue was this week’s U.S. monthly new non-farm unemployment claims report.

Is July the Turning Point? Or Just Another Move Down Within Price Channels?

The U.S lost 467K jobs in May, about 29% more than the 363K forecasted and 45% above April’s surprisingly small (at least in today’s market) loss of only 322K jobs. This report, issued at the beginning of June, had fed hopes that the worst might be over, and kept world stock and commodity markets mostly, trading in a horizontal range near their highs for the year, awaiting further news to justify the 20-30% gains in stocks since the beginning of March and nearly 100% gain in crude oil since 2009 began.

Friday’s trading was mixed as the markets stabilized to digest the news and await further data.

Big Themes For the Coming Week

Thus until the next big news hits, the likely best scenario is for continued trading in ranges established over the past 4-8 weeks, as riskier assets approach and test the low end of their price channels for support and safer currencies possibly drift up to test the upper price ranges.

If nothing comes sooner, earnings guidance and announcement in the coming weeks could be the catalyst for the next big move. Most important will be from the financial sector, which has been the source of major market moves over the past two years.

Thursdays’ much anticipated and very disappointing monthly new non-farm unemployment claims report gave us perhaps the biggest clue about the recovery (or lack thereof)since the IMF issued its downward revision of growth prospects for most of the world’s economies about two weeks ago. The OECD followed days later with a slightly more upbeat forecast based on a more optimistic view of the U.S. economy, which it predicted would provide enough improvement to outweigh the admittedly worsening picture elsewhere. The OECD view appears less likely in view of the much worse than expected US jobs picture for May.

Thus the rally in world “risk assets” like stocks, commodities, and riskier currencies like the AUD and NZD may indeed be well ahead of supporting fundamentals, and thus vulnerable to pullback. Resulting risk-aversion would be likely to include:

Gains by safe-haven currencies (JPY, USD, CHF) against riskier and commodity-based export currencies (AUD, NZD, CAD)
Downward pressure on commodities, and stocks, either in the form of an outright downtrend, or continued trading in the current ranges established over the past 4-8 weeks, with risk assets approaching or testing support levels, and safe haven assets like USD, JPY, and CHF currencies moving in the opposite direction
If March lows tested in global stocks, possible long opportunities, especially for buy and hold income stock investors

US Dollar: Still in Horizontal Channel, But Risk Appetite Will Decide

Risk Appetite has Been the Key Factor in Currency Markets, So Rising Fear Could Boost the USD Toward Its Upper Range

Summary

Overall USD Outlook: Neutral – But More Fear Could Well Boost the USD

Thursday’s non-farm payrolls disappoint badly, suggest accelerating job, spending, and bank asset decline. Supporting the sense that the US jobs picture is indeed worse than expected was the lack of rise in average hourly wages and decline average hours worked. Thus even the officially employed are overall, earning less.
ISM manufacturing shows contraction continuing to slow down, but still below 50, for 17^th straight monthly decline
US consumer confidence data disappoints due to lack of evidence of growth, especially job and wage growth. Not good, but not so bad, since recent incidents of positive news on confidence has not translated into increased spending, which is the primary value of this data.

USD Rises on Fear, Not Fundamentals

Risk aversion, certainly not fundamentals, made the USD the strongest of the majors. In May there were those who questioned whether the dollar was still seen as a safe haven. Both the World Bank downgrading of world economic growth and the recent US jobs data driven market drops have reaffirmed the USD’s safe haven status.

Since the current crisis began, bad news, especially from the still most economically important US, has paradoxically strengthened the dollar in the short term because it is still seen as a safe haven. However, given the worsening employment and wage picture, the longer term picture for the USD is worrisome, since fewer jobs and lower earnings means less consumer spending, which is about 70% of the US GDP. Of course that means lower exports to the US for the rest of the world’s economies, which would also weigh on their currencies. Thus the dollar need only be the least ugly currency of the bunch to be the strongest.

Perhaps the biggest news Monday is the US ISM Non-Manufacturing Purchasing Managers index (PMI), which is expected to improve from 44 to 45.9, that is, show decreasing contraction. This figure is a leading indicator for about 70% of economic activity in America, and includes the huge US services, retail, and financial sectors. A positive surprise could at least help keep markets in their multi-week trading ranges. The opposite could add fear to an already nervous currency market, and trigger more risk aversion and USD strengthening.

Euro Volatility Likely Ahead of Central Bank Interest Rate Decision

Summary

Overall Euro Outlook: Bearish

Despite poor growth, rising unemployment and possible deflation prospects for 2009, ECB leaves rates unchanged
Euro Zone Industrial data indicates weak domestic demand
Yet German Retail Sales provide some optimism on domestic consumption.

Neither the ECB’s refusal to lower rates, nor the nasty US jobs picture, could get the EUR/USD out of its recent tight trading range, as if they both seem to become less appealing at the same relative rate. Thus the 1.400 support level has held.

Potential Market Movers for the EUR

News that might move the pair this week includes:

The US ISM Non-Manufacturing report. As noted above, a disappointment would likely up the anxiety levels, drop stocks, and boost the Buck
Final Revisions to Q1 Euro Zone and British GDP

JPY Likely to Strengthen as Risk Appetite Fades

Summary

Fundamental Outlook for Japanese Yen: Bullish

Japanese Consumer Prices Drop in May, Raising Risks for Deflation
Manufacturing Confidence Rebounds From Record Low
Japanese Trade Surplus Widens as Imports Sputter

The Yen and US Dollar share two key similarities

Like the USD, the near term fortunes of the JPY will depend mostly risk appetite, not underlying fundamentals for the Japanese economy. Thus the more gloom for everything else, the more these two tend to rise
That’s good news for both currencies, because both economies are struggling

While the Bank of Japan forecasts some economic recovery in the latter half of 2009, retail spending is expected to shrink for the ninth consecutive month in May, with the unemployment rate projected to increase to 5.2% during the same period, which would be the highest since 2003. This data could create a weakening outlook for the world economy as the downside risks for growth and inflation intensify.

GBP, Already Pounded by Growth Figures, Political Uncertainty, May Take Further Abuse from BoE Rate Decision

Summary

Outlook for British Pound: Bearish

UK Q1 PMI Service drops in June from 51.7 to 51.1
June UK manufacturing PMI rose from 45.4 to 47.0, but the above services drop outweighs it
UK Q1 GDP fell 2.4%, revised lower from -1.9%

Time to whip out that stiff upper lip, they’ll need it (as do we all).

The Sterling had jumped higher to start the week after Nationwide showed house prices gained 0.9% in June which spurred hope that the housing sector stabilization would lead the way to a recovery. However, the depth of the first quarter contraction shook forex traders as they realized that Britain would need to dig itself out of a deep hole. Although manufacturing reach its highest level since May 2008 at 47.0, it remained below the 50 boom/bust level for the fifteenth consecutive month. Adding to the bearish sentiment was the key service sector regressing to 51.5 from 51.7, which, similar to the US, accounts for 70% of GDP.

Nevertheless, the sector remained in expansion territory so not all is lost. Also, the BoE reported that Brits are paying down mortgage debt at a record pace. Good in the long term, though bad for key consumption figures in the short term.

Potential Key News to Move the GBP Markets

The upcoming Bank of England rate decision could be the major event risk for the week if we see the central bank issue a statement addressing its future intensions regarding quantitative easing. It is widely expected that they will leave their benchmark rate at 0.50% with signs that downside risks remain for the economy. Some believe the next step for the BoE is to develop a plan to unwind its quantitative easing policy. However, MPC member Tim Besley said this week that 'there is no sense in which there is a specific timing discussion,' when asked about QE and how to get out of the policy.

Manufacturing, consumer confidence and inflation data this week will provide insights into the state of the U.K. economy and the scope of a recovery. Slower output growth and declining prices will add to the bearish outlook that is beginning to form, while an increase in consumer confidence will give hope. Additionally, the Visible Trade Balance report will show us that state of demand for British goods.

The GBP/USD has broken below the 20-Day SMA which it hadn’t closed below since 4/29 adding to the signs that we may see continued losses for sterling this week. However, improving fundamental data and a positive BoE help the GBP.

Again however, the big force in forex is risk appetite/aversion. If global markets move down, so might the GBP/USD

Commodities and Equities

Summary

World Bank downgrade of economic growth forecasts
OECD’s mildly more upbeat outlook based on a more optimistic view of the US, which is proving wrong, as shown by Thursday’s nasty picture of the US jobs and average hourly wage and hours situation, which will further batter consumer spending and ultimately the critical financial sector

The rising pessimism suggests

Near term drop in industrial and agricultural commodities prices
Lower earnings and thus stock prices
Possible near term deflation , with inflation expected as things improve, especially with the unprecedented flood of new fiat bills in all major currencies and thus long term rising demand for precious metals and other hard assets as an inflation hedge

So What Should An Investor Do?

Stock markets tend to be the best barometers of recovery sentiment. Thus:

1. If equity indexes rise, expect commodities and higher risk currencies and commodity currencies [AUD, NZD, CAD] related stocks to perform better against the safer currencies, the JPY and USD.

2. Expect the opposite if they fall.

3. If stock markets come in to test March lows, that could provide an opportunity for investors,

Disclosure

I have positions in most of the above mentioned investments.

Must-Know June Postmortem: World Markets, The Dollar, The Banks

2009-07-02T08:47:00.000-07:00

An End of June Review of World Markets and What They're Telling Us

Introduction: "It's the Economy, Stupid" (Still)

In our prior bi-weekly review of world markets, we recalled the above famous summary of Bill Clinton's presidential campaign theme that helped him seize the White House from George Bush Senior in 1992. Then too, the U.S. economy was suffering a decline that started with…surprise!!... irresponsible bank lending and a resulting Savings & Loan (S&L) banking crisis that threatened the health of even the largest U.S. banks.

FYI, the S&L crisis was not the first time in even recent memory that irresponsible bank lending in pursuit of short term gave the US economy a kick in the groin. Remember the "Latin American Debt Crisis" of the early 1980s?

We didn't learn from history, so here we are again, repeating it.

The Big Question (Still): Do Fundamentals Support the March Rally?

In Mid-June, global markets had already begun pulling back from their March rally highs, and mostly spent the rest of the month dropping then recovering to roughly the same level they held in mid June, and thus have recently stayed in mostly tight trading channels. In sum, the same indecision about the rally and recovery remains.

Thus at the end of June, the same big question hangs over world markets:

Will regional and/or world economies improve in the coming year enough to justify the 20%-30% rise in riskier assets like stocks, the roughly 30% overall rise in the riskier currencies (AUD, NZD) against the perceived safest currencies (JPY, USD), and roughly 100% rise in crude oil?

The Short Answer: No

The evidence we have so far does not appear to support these rallies, since we just don't have signs that employment, GDP, earnings or anything else is likely to improve 20% or more in the coming year. But traders have not given up, and markets still are waiting clarity. Until then, markets may continue to bounce around within trading ranges.

So, Are We On the Brink of Disaster?

Not necessarily.

On the One Hand, the Banks are Still on Life Support

Bank fundamentals stink and are likely to get much worse along with rising unemployment and the resulting further deterioration of every kind of debt portfolio they own, and that's just the stuff we know about.

On the Other Hand, No One Dares Pull the Plug

Washington and Wall Street (oh, what the heck, Brussels, London, Beijing, Tokyo, etc) will band together if needed to keep the US and world economies going, and that means sustaining the banks. Per IMF estimates they'll need another $500 Billion to cover the bad loans. So far they have about $200 Billion. Guess who'll be ultimately covering that, fellow US taxpayers? Think the IMF figured in the off balance sheet stuff, the credit cards, etc?

In sum, lots of pain ahead for We the People, but no need to run out and buy shotguns quite yet.

The USD: Down But Far From Out

Another key issue overhanging world market is the status of the US dollar. America's creditors, essentially the entire world, and especially the major exporters like the BRIC group (Brazil, Russia, India, China), have regularly expressed both desire to diversify out of the dollar and continued support for it as the world's reserve currency. Beyond mere words, they have continued to buy Treasury bonds with gusto. This divergence between words and action already has traders beginning to interpret such talk as, well, just talk, and adding a whole new interpretation to what the 'B' in BRIC stands for.

No One Will Let the Dollar Die. Nor Will the Exporters Stop Buying the US Dollar or Treasury Bonds

Ok, BRICS, honesty time.

What else can the exporters / America's Creditors do?

Threaten Washington to Prevent an "Obamanably" Devalued Dollar

On one hand, America's creditors and importers justifiably feel they must at least try to threaten Washington with consequences so that Obama will make some attempt to minimize new debt, money printing, and other dollar obamanations. Of course, the US debt will be paid. The question is, will the dollars paid still be worth much. Most exporting countries hold very large portions of their foreign currency in USD. For example the Chinese are estimated to hold well over 60% of their reserves in dollars.

That becomes one very putrid, large corpse if the dollar rolls over.

Cover Your ASSets (and Exports)-Support the Dollar

On the other hand, most of America's creditors/importers depend on the US consumer for an irreplaceably large proportion of their exports. Who else will replace that volume of purchases?

Domestic consumption won't do it, not in the near term. Export countries are successful usually because their workers don't get paid much, and often actually save whatever money they can. That makes them lousy consumers. Thus to keep their factories going and workers employed, they will continue to buy Treasury bonds and thus fund the US consumer.

Short Term Exporters' Employment Concerns Support US Treasury Purchases

In the short term, that keeps up their employment levels, which are often already hurting.

In the longer term, all that accumulating US debt could devalue or need to be "renegotiated." So long term interests would perhaps be better served by buying less US debt, even if it means reduced exports, employment, political stability, etc.

Long term good versus short term gain (while they're still in office). Hmmm. What do YOU think a politician (any nationality) is likely to choose?

Forget the US Banks. The Dollar and the US Economy comprise the ultimate "too big to fail."

Admittedly, in a worst case scenario America's creditors could wind up much like the US financial industry. Having lent money to those not creditworthy to fuel near term revenues, they may wind up with a lot of bad debt. Who will bail THEM out? One way or another, their taxpayers will, of course.

Hey, considerate it a partial pay back on the Marshall plan, foreign aid, whatever.

Thus while the USD may continue to weaken in the near term, its status as reserve currency seems quite safe for now. Ditto the market for US Treasuries. Indeed, a new bout of fear, aka "risk-aversion" could send it higher along with the other safe haven currency, the Yen.

Conclusion

Barring a big surprise event in the coming weeks, the likely near term resolution could come from the emerging theme in second quarter earnings, especially from the big financial institutions. From these the current crisis began, from these the March rally ignited, and from healthy banks and credit markets will come a critical pillar of economic recovery. Many face considerable challenges, like unemployment levels already beyond bank stress test worse case scenarios that will only exacerbate their capitalization problems.

However, because confidence in the financial system must be maintained, governments and banks worldwide will literally band together to do whatever is needed, and that's one powerful team to try to sell short.

If the markets perceive overall earnings positively, we could see some additional rallying or at least stabilization at current prices

If earnings disappoint, a retest of March lows becomes more likely.

A mixed earnings season would suggest more range-bound trading. On optimistic days, riskier assets like stocks, commodities, and their associated riskier currencies would move up against the safer but lower yielding assets like the USD, Yen, and Treasuries. On pessimistic days, the opposite result.

Disclosure: The author may have positions in above mentioned assets, or that might benefit if the above is correct. Indeed, he dearly hopes so.

WEEKLY MARKET PREVIEW FROM INTERNATIONAL FX, COMMODITIES, & EQUITIES: JUNE 29, 2009

2009-06-28T05:34:00.001-07:00

A Quick Preview of What World Financial Markets are Hinting About the Coming Week

1. Big Themes For the Coming Week

Forex, Commodities, World Stock Indexes are likely to remain in trading ranges of the past 6 weeks until further clarification about economic recovery. If nothing comes sooner, U.S. banking earnings in the coming weeks could be the catalyst for the next big move.

March rally in world stocks may be well ahead of supporting fundamentals, thus vulnerable to pullback.

- Resulting risk-aversion would be likely to include:

- Gains by safe-haven currencies (JPY, USD, CHF) against riskier and commodity-based export currencies (AUD, NZD, CAD)

- Downward pressure on commodities, stocks

2. US Dollar Nears Breakout Versus Euro, Awaits Nonfarm Payrolls Results

Overall USD Outlook: Neutral

- Markets awaiting further clarification

- Dollar Rallies on Monday stock selloff, loses gains on improving optimism

- Technical weakness in stocks suggests increasing risk aversion, USD breakout risk up

While the USD finished the week slightly down against key counterparts, and may show further short term downward momentum, markets remain indecisive as reflected by generally narrow trading ranges for USD pairs like the EUR/USD and GBP/USD.

In sum, markets appear to be waiting for news to clarify near term direction, and the coming calendar of events might provide it. The likely big news of the week is Thursday’s US Nonfarm Payrolls data, though most expect US employment to continue to worsen even as other data shows improvement. Tuesday’s Conference Board Consumer Confidence numbers may spark some movement, though improving optimism has not been influential because it has not resulted in increased spending. Wednesday’s ISM Manufacturing results, especially the ISM Manufacturing Employment index, could also set the mood coming into Thursday’s US employment report.

As noted before, stocks world-wide remain up 20-30% since the March rally began, despite any evidence suggesting that jobs, earnings, GDP, or any other meaningful metric will improve by that much in the coming year. This leaves them vulnerable to a decline which the past weeks show may have already begun. If so, declining risk appetite would likely boost the USD (also JPY and CHF) against other majors, especially those seen as higher risk (AUD, NZD) and/or linked to commodity prices (CAD).

3. Euro Volatility Likely Ahead of Central Bank Interest Rate Decision

Overall Euro Outlook: Bearish

- Despite poor growth and possible deflation prospects for 2009, ECB resisting pressure for rate cuts

- Uncertain if ECB’s loans last week to major banks will translate into cheaper, easier credit for businesses

The ECB issues a contested interest rate decision Thursday. The ECB continues to maintain that current interest rates are “appropriate” for now, while other influential voices, including the OECD are urging that rates cuts toward zero similar to those of the U.S.

Credit Suisse’s overnight index swap index shows traders are now pricing in a 56.5% chance of a 25 basis rate cut, a noticeable reversal from the 62.7% chance of a rate hike showing just two days ago. Besides the admittedly global phenomenon of sickly economic growth in 2009, arguably the most pressing reason to reduce the cost of money is to check the onset of deflation, which recent Euro zone PPI and CPI suggest could be a real threat.

Although the ECB did offer an unprecedented 442 billion euro in 12-month bank loans as a means of de-facto monetary easing and will also move forward with a 60 billion bond-buying scheme announced at the last policy meeting, these measures may prove woefully inadequate.

There is no guarantee that banks will lend out the funds and thereby stimulate the broad economy. Indeed, banks may chose to hang on to the cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, per the IMF, as well as the fallout from a developing currency devaluation in Latvia. Alternatively, they may use the funds to reduce other obligations and shore up their balance sheets.

Still, the ECB seems willing to concede economic performance to ensure low inflation, with ECB member Jurgen Stark openly suggesting that GDP growth may say low “for years to come”. Thus traders could punish the Euro as they price in expectations that the region will substantially lag behind other industrial economies in recovering from the current downturn, forcing interest rates to stay lower for longer than elsewhere.

Euro Zone Economic Confidence figures are expected to tick up in June, though some recovery in sentiment is to be expected as governments’ fiscal efforts filter into the broad economy.

The big question for now is whether growth is sustainable after stimulus cash dries up.

4. JPY Likely to Strengthen as Risk Appetite Fades

Fundamental Outlook for Japanese Yen: Bullish

- Japanese Consumer Price Tumble Lower in May, Raising Risks for Deflation

- Manufacturing Confidence Rebounds From Record Low

- Japanese Trade Surplus Widens as Imports Falter

Similar to the USD, the near term fortunes of the JPY will depend on how optimistic markets are feeling about the recovery, and the ensuing level of risk appetite. The greater the fear level, the better the JPY will do, and vice versa.

The World Bank further lowered its already dismal growth outlook on Monday, which prompted a world-wide selloff in virtually everything except the JPY and USD. As the week progressed markets chose to focus on what positive news there was, including, a modestly more upbeat forecast from the OECD, was based on a more optimistic forecast for U.S. recovery to outweigh worsening conditions elsewhere.

While the Bank of Japan forecasts some economic recovery in the latter half of 2009, retail spending is expected to contract for the ninth consecutive month in May, with the unemployment rate projected to increase to 5.2% during the same period, which would be the highest since 2003. This data could create a weakening outlook for the world economy as the downside risks for growth and inflation intensify.

5. Disappointing Growth Figures Threaten British Pound

Outlook for British Pound: Bearish

- House prices fell by 0.4% in June, which was the first decline in five months

- The British Banker’s Association reported an increase in mortgage approvals in May to 31,162, the highest since April 2008

- OECD lowered its growth forecast for the U.K. to -4.3% from -3.7%

The British Pound finished the week on a positive note after a week of inconsistent price action as it found support from increasing appetite after Monday’s selloff in stocks. Also, the first decline in house prices in five months raised questions over the scope of a U.K. recovery and added to sterling weakness to start the week. The OECD downgrading their growth outlook for the U.K. economy to -4.3% from -3.7% furthered the dour outlook for the economy. A mid week head & shoulder’s pattern and a break below the 20-Day SMA appeared that the pound was head for a significant retrace before it regained its footing.

The BoE warned on Friday that the banking system is still vulnerable to any new economic or financial tensions and that banks will need to be able to survive without government help. It expressed concerns about the ability of banks to extend enough credit to support economic growth if new market strains appeared. Additionally, the central banks cautioned lenders that the level of government aide will dwindle as it becomes less effective, leaving them to fend for themselves. Therefore, if we see the pace of the recovery slow then the downside risks for the GBP could increase exponentially.

The UK economic calendar may give us some insight into the pace of the recovery and the depth of the hole that it finds itself in. Final 1Q GDP figures are expected to be revised lower to -4.3% from -4.1% as the recession deepened during the period. Preliminary GDP readings showed a 12.1% drop in total production which was already double the decline from the fourth quarter.

Forward looking forex traders may not rely on past performance. Rather they may focus on the upcoming PMI readings. The manufacturing gauge is expected to improve for a fifth straight month to 46.4 from 45.4, which would be the highest level since July 2008.

However, the service sector is predicted to fall to 51.5 from 51.7 which is similar to what we saw in the Euro-Zone figures. This sector accounts for much more of the U.K. economy, as much as 70%, and may have a greater impact on sentiment. If we see an upside surprise in the service data then we could see sterling continue its gains with a test of 1.665 the June 3rd high. Meanwhile, weakness in both sectors could be the catalyst for a retreat of the GBP. The GBP/USD has been supported by the 20-Day SMA and a clean break below that level would be a strong signal of more bearish potential with a possible test of 1.600.

6. Commodities and Equities

As noted in the first section above, these will move together with sentiment on the recovery. Optimism suggests

- Growing demand for industrial and agricultural commodities

- Better earnings and thus rising stock prices

- Possible inflation, especially with the unprecedented flood of new fiat bills in all major currencies and thus rising demand for precious metals and other hard assets as an inflation hedge

7. Conclusion: So What Do You Do?

Stock markets tend to be the best barometers of recovery sentiment. Thus:

1. If equity indexes rise, expect commodities and higher risk currencies and commodity currencies [AUD, NZD, CAD] related stocks to perform better against the safer currencies, the JPY and USD.

2. Expect the opposite if they fall.

Investors, especially buy and hold income investors, need to take a longer view that reflects the big themes mentioned in section 1 above, which we suspect will endure for the coming months. Their income investments should be tied to a diverse basket of currencies, commodities, and other hard assets.

8. Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

Interested in learning more about investing in stocks that provide reliable high dividends with better transparency, appreciation potential, and liquidity than bonds? Visit http://highdividendstocksguide.blogspot.com

Want a quick read on the big picture on how world markets affect each other and your investment? Watch for the coming: http://Worldmarketsguide.blogspot.com as well as daily weekly commentary at www.avafx.com/analysis

Beware: Why U.S. Banks Will Rock World Stocks, FX, Commodities

2009-06-26T08:21:00.001-07:00

Or: This Summer’s Real Blockbuster: Night of the Living Dead (Banks) II: A Sneak Preview – and Survival Guide

Or, It’s Bank Earnings Time: Assume the Position, Chicken Boy,

Forget the movies. Forget the roller coasters. This summer’s real excitement: the coming second quarter bank earnings announcements, and their potential affect on world stocks, currencies, and commodities markets.

Having followed all these markets for a while now, it’s a lot like any classic horror or action flick. You know the basic plot, but it can still get you sweating.

1. Introduction: The Chronicle of a Crisis

All major market shifts since 2007 have begun with the U.S. banks. With them the crisis began, with them the rallies began. With them may come the next move down, and only from their true recovery will there arise a genuine recovery. Amen.

Their coming earnings announcements, and the ensuing government responses, are likely to be the economic event of the summer.

Let’s quickly review a brief chronicle of the crisis.

The current world economic crisis began as a self-inflicted U.S. banking crisis.

The still alive March rally in stocks and commodities began when the big financial institutions announced first quarter profits. As repeatedly noted by this author and others, this feat required an unprecedented collaboration/conspiracy involving Washington and Wall Street. These profits were not from genuine ongoing operating results likely to be repeated, but were rather a result of a combination of some rather irregular activities, including:

· fabricated hyper-profitable fixed income department trades with AIG, which by themselves were large enough to outweigh the enormous real operating losses

· overstated asset values aided and abetted by bank regulators and the suspension of market to market accounting

When that rally faltered, Washington announced more help in the form of the Public-Private Investment Program (PPIP), another thinly disguised bank welfare program, paid for by U.S. taxpayers. That maintained optimism about the banks, and thus the market, and forced the massive shorts to unwind, thus continuing the low volume meander up to 30% gains.

Within the month, the leading financial institutions on which America depends will announce second quarter earnings. For example, Citibank (C) and Goldman Sachs (GS) are scheduled to announce on July 17^th. Rumors and whisper numbers may come sooner. If positive, the will almost certainly be leaked sooner.

Unemployment is already around 10%, well past bank stress test worst case scenario 8.9%. That means many thousands more residential and commercial mortgage defaults. Worse, those tests were before GM officially rolled over into bankruptcy.

Can Team Washington & Wall Street pull it off again?

Barring some incredible surprise, luck, or creativity (all possible), we think not, and here's what that means.

2. Scenario 1: Banks Show Losses: Ramifications for World Stock, Commodity, and Currency Markets

Given the above history, if bank earnings disappoint, we can expect some version of the following chain of events: In essence, faith in the fragile, nascent, embryonic world recovery breaks down. From this follows:

A. U.S. stock markets plunge

We get a likely to retest March lows assuming the process hasn't already begun. A brief look at a daily S&P chart will show the March uptrend has already been decisively broken.

S&P Daily Chart (courtesy avafx.com)

B. World stock markets follow

They have faithfully followed each other through this crisis, and thus can be expected to continue to do so barring evidence to the contrary. After all, the U.S. is still the major customer of the big exporters, including China. Their economies depend on the America. For all the talk at the first official BRICs summit, the BRICs will crack without a robust U.S. consumer market.

Think the world can roll along without a sick U.S. economy? This past week both the IMF and the Paris based Organization of Economic Development (OECD) came out with predictions about the world economic situation. The IMF said things were getting worse. The OECD disagreed. What was the basis for their difference? The OECD believed the U.S. would improve enough to make up for the continuing worsening situation in the rest of its member countries.

C. Commodities Crash Too

The ensuing gloom presumes weakened demand for industrial commodities like crude oil, at least in the short term. Deflation becomes a bigger concern than inflation, so the precious metals become less so.

D. Currencies: JPY, USD, CHF Tend to Rise Against Other Major Currencies

Paradoxically, the U.S. dollar actually becomes a short term beneficiary of the pessimism about the U.S. and world economy. For those who don't follow currencies trading, the USD is considered a safe-haven currency in times of fear or "risk aversion,” second only to the Japanese Yen (and then followed by the Swiss Franc).

For example note how the Euro-dollar currency pair EUR/USD (currencies always trade in pairs, since one currency must somehow be priced relative to something else) has behaved since stock markets were at March 3^rd lows, as depicted on the below daily EUR/USD chart. Note that we read this combination to mean "Dollars per Euro." Thus the rising price of this currency pair mean more dollars per Euro, the Euro is appreciating against the dollar.

EUR/USD Daily Chart (courtesy avafx.com)

Note how when fear was at its highest in autumn 2008 and in early March 2009, the Euro, and all other major currencies (except the Yen), were at recent lows against the USD. As the March rally has progressed, they've generally gained (except the Yen) against the USD, as optimism fed "risk appetite" and currency traders sought higher yielding currencies.

Here's another example, a daily chart of the AUD/USD. Note a similar pattern.

AUD/USD Daily Chart (courtesy avafx.com)

The Australian dollar tends to behave in an especially inverse manner to the USD. Not only does its central bank pay among the very highest interest rates among the major currencies (unlike the Fed with the USD paying among the lowest), Australia is a commodity export based economy. Thus demand for its exports, and for the AUD, varies with anticipated economic growth more than the USD. So when the world economy looks bad, lower exports are anticipated and traders tend to dump the AUD in favor of the USD and JPY. Whether you agree that these are in fact safer or not, that's how traders treat them.

3. Scenario 2: Banks Post Positive Results: The Opposite Reaction?

Here's where it gets less clear. The short answer is, it depends how positive. If they somehow show profits from ongoing operations that are likely to continue (no, I don't see how either, but put that aside for the moment), then depending how convincing their ongoing prosperity is, the recovery is likely to be truly under way. If however, the results are mixed, or, as is so the fashion these days "less bad than expected and thus somehow positive" then the picture is murky.

4. Conclusion: So What Do You Do?

If the banks were left to themselves, the strong likelihood would be scenario 1. But given that Washington can't let them die, the question really is, how much can Washington still do to minimize the damage?

If you believe in Scenario 1, take profits on stocks; consider some kind of short on stocks (buy puts on the S&P or other indices, Ultrashort Proshares for short term hedging (like SDS on the S&P, SDK on the financials). Currency and commodity traders should short commodities, go long USD, JPY against other major currencies, especially the CAD and AUD.

If you believe in Scenario 2? If the mood is very positive, consider buying stocks, commodities, and the higher yielding currencies (AUD, NZD) or commodity currencies (AUD, CAD) against the USD and JPY.

Disclosure: The author may hold positions in the above instruments.

5. Conclusion, Disclosure & More Info

In Part I we looked at the current market, and the case against the US Dollar.

In Part II we reviewed the current market, the case for the USD, and the key criteria that make a high dividend stock a USD hedge.

In Part III we briefly described the best sectors and listed specific recommendations that fit these criteria. Thus we saw a listing of the best high dividend stocks outside of the U.S.

In Part IV we’ll look at the best high yield dollar hedges among the U.S. stocks.

The coming articles will examine individual categories and stocks in greater detail.

Disclosure: I have positions in most of the above mentioned investments.

Why I'd Buy Toyota, The #1 Automaker in the U.S.

2009-06-25T09:44:00.000-07:00

Introduction

In Why I'd Avoid Toyota, The #1 Automaker in the U.S, Tom Lindmark sites the Wall Street Journal's report that shrunken down post bankruptcy versions of General Motors and Chrysler will leave Toyota the #1 seller of light vehicles in the U.S.

His essential point was that while Toyota might triumph in the long run, in the short run they must contend with "the most fearsome of competitors-government owned companies."

Fortunately I wasn't drinking anything when I read that line. Spraying liquid through one's nose is so undignified.

Actually, Mr. Lindmark has some justification, saying "In the short run it (the government takeover) could be formidable as the government does whatever is necessary to prove it didn't make the stupid decision that everyone acknowledges it."

But seriously, folks. Let's think about this for a minute.

Reasons To Be Cheerful (for Toyota)

Inexperienced Bureaucrats & Politicians to the Rescue: Right. GM could not compete when run by presumably well paid experienced executives with real budgets at their disposal. How will they compete with the same basic team under inexperienced government bureaucrats with atrophied resources, no matter what high profile wizard they find to run daily operations?

Government Resources Are NOT Unlimited: Given its current commitments bailout commitments, how much more taxpayer cash can the government politically (forget the overheating presses at the mint) afford to throw down another sinkhole as taxes rise and the dollar decomposes? As Treasury Secretary Geithner's meetings with U.S. creditor nations over the past month have shown, our debt holders' patience is not limitless.

U.S. Creditors' Patience is REALLY Not Unlimited: Since when did China, Japan, Russia, the IMF, and Moody's have all feel the need to reaffirm their commitment to the U.S. dollar as the world's reserve currency is indicative that they felt the need to do so. Doubts are growing. They need to protect both the value of their USD reserves, as well as the US consumer's ability to keep buying the world's exports. The Russians and Chinese know what too much socialism brings. The Japanese know all about what happens when you don't let "Zombie" companies expire.

Washington's Stellar Track Record: Even with taxpayer subsidies, when has the US government and its sheltered bureaucrats ever beaten a determined, well capitalized, well run competitor with its own cash on the line?

Package delivery? See Fedex, UPS, et al.
Public Education? Ask any parent who can afford the alternative.

A Tale of Two Companies – How Each Dealt with Competitive Threats.

GM
Having watched both companies since high school days in the early 1970s, two incidents come to mind about how each dealt with competitive threats.

In my days as an MBA student at Cornell, we had an affable GM board member/executive (I forget which, but the difference is irrelevant) as a part time teacher/scholar in residence. He appeared on occasion as a substitute teacher to tell us war stories meant to give us a taste of real corporate life. Burdened with heavy course loads, we avoided his amusing but mostly irrelevant classes whenever we knew he'd appear. However, he left me with one key lesson.

Whenever asked about how GM, THE symbol of American industrial might, planned to counter the clearly more reliable, fuel efficient cars that Toyota et. al were making, he assured us GM cars were just as reliable, overall just as good, and all was well at GM.

I was shocked. We were all a bit amused.

Of course, everyone knew this was nonsense. Even my conservative-buy-American parents, stung by both the bitter fruits of "planned obsolescence" and the fuel crisis of the early 1970s, had recently bought there first non-American made car ever – a Toyota. The differences in reliability and fuel efficiency were clear even to them and their skeptical peers.

Yet this captain of one of America's most important companies didn't get it. As the following years showed, he was indeed a representative sample of GM leadership.

Toyota
A few days ago, Toyota leaders met to discuss their first quarterly loss ever, newly crowned company president Akio Toyota kicked off his tenure by publicly accusing company leadership of imitating the failed habits of GM and vowed to return the company to success by slashing expenses and producing more fuel efficient, affordable cars.

This kind of public table pounding is, ahem, rare in the oh-so polite, face-saving corporate culture of Japan.

Clearly Akio intends a quick turnaround, not a 30 year slide. Face-saving be damned.

They already have the most fuel efficient car on the road, the Prius. The firm plans to have a fuel cell car by 2015. No resting on laurels here.

Conclusion: So How To Profit?

When the banking crisis is truly over and stocks bottom out (not yet, see my prior posts for more) Toyota might be an investment for those who want to an auto industry play.

Don't worry about Toyota. Save your concern for the auto workers and suppliers stuck with GM.

"Ladies and Gentlemen. In this corner, wearing the World Champion belt, Toyota Motors, led by Akio "the Ninja" Toyoda. In this corner, wearing nothing but a barrel, G.M, led by Obama Administration and UAW approved, former Postmaster General, Political Hack Extraordinaire…

Oh well, may Obama can get Theo Epstein to take a leave of absence from the Red Sox. Hey, they hadn't won for 80 years.

Disclosure: The author owns a Toyota Prius, and (sigh) some GM bonds.

Overseas Markets Regain Support Levels, Europe Stumbles, Will Wall Street?

2009-06-25T06:41:00.000-07:00

(As of approximately 2:00pm GMT Thursday, 10:00 am EST)

Introduction

Despite mixed news on Wednesday, world stock indexes and commodities continued to erase the Monday's losses, and along with currencies have returned to their multi-week trading ranges prior to this June 22nd worldwide selloff.

As we've noted earlier, the continuing lack of overall positive news that might suggest that employment, earnings, GDP, or any other significant economic measure is likely to improve within the coming year as much as stock prices have already increased, it remains to be seen if world markets can continue to stabilize and improve.

Currencies

Reflecting the return to recent trading ranges in other markets, major currency pairs have returned to pre-Monday trading ranges along with stocks and commodities, providing chances for traders to open positions near support or resistance as currency pairs test the lower and upper price ranges.

The dollar against the Euro and Yen, helped by a surprising surge in May Durable Goods Orders, suggesting growing production, and supportive words from the Minutes from the concluded Federal Reserve Open Market Committee, which included:

No change (i.e. increase in planned monetary or debt expansion) in current stimulus programs
A modestly upgraded outlook for the U.S. economy

World Stock Indexes

After Monday's drop, the daily charts for Tuesday on the S&P and most other world stock indices showed cross shaped candlesticks called Doji Stars, which typically indicate uncertainty (since prices fluctuate but end the day unchanged, like someone failing to make up their mind about which way to go) and a possible change in direction.

For the third straight time this month, these candlesticks correctly forecasted a direction change, this time to the up side. Asian markets showed solid gains in the early hours (GMT) of Wednesday, Europe generally followed through with more modest gains, and the U.S. markets rose strongly. The major Asian stock indexes opened Thursday's trading with a repeat of impressive 1%-2%+ gains, but Major European indices are down as Euro zone industrial orders dropped by over 33%, a record decline, indicating falling demand for capital and intermediate goods. In response, S&P futures point to a mildly negative opening of U.S. markets

It is interesting to note that this disappointing news from European industry stands in stark contrast to Wednesday's strong durable goods orders increase in the U.S. The European central bank has been more restrained in its stimulus programs than its American counterpart, the U.S. Federal Reserve. Could these results begin to suggest which approach has been correct?

Commodities

Declines in both pessimism and the USD helped Crude and Gold get back over recent support levels of around $68 and $923 respectively. Further short term moves will depend on news. Both have been trading within tight ranges just above prior weeks' support.

Breaking News to Know

Yen Weaker Against USD as Fed Indicates Improving American Economy

Short Selling of S&P Rises for First Time Since March. Do Short Sellers See a Near Term Drop Coming? Health care companies were among the biggest targets of short sellers as Obama's proposed health care industry reform is widely viewed as a threat to profits.

The final reading for first quarter of U.S. GDP came in with a 5.5% annualized decline, which is a slight improvement from the 5.7% annualized decline that was previously reported and also below the 5.7% decline that was widely expected. Personal consumption for the first quarter was revised modestly lower to reflect a 1.4% increase. Initial jobless claims for the week ending June 20 totaled 627,000, which is above the 600,000 claims that were expected. Initial claims in the prior week were revised upward

Coming News to Watch

S&P futures vs fair value: -5.00. Nasdaq futures vs fair value: -8.00. In overseas trading, European stocks are grappling with selling pressure

Economic Calendar (All times GMT, order of figures from left to right: Actual-Forecasted-Prior)

Today's major economic calendar includes data coming out includes:

1:30pm USD Unemployment Claims ? 605K 608K
3:00pm USD Fed Chairman Bernanke Testifies
11:45pm NZD GDP q/q ? -0.7% -0.9%

WorldMarketsGuideDiary: Fear Eases, Stocks Stabilize, Commodities, Currencies Rebound Against USD

2009-06-24T04:59:00.000-07:00

FEAR EASES, STOCKS STABILIZE, COMMODITIES & CURRENCIES REBOUND AGAINST SAFE-HAVEN USD TO RECENT SUPPORT LEVELS

(as of approximately 12:00 GMT, 8:00am EST Wednesday)

Introduction

Despite the lack of any really positive news to balance the World Bank's negative announcement about the world's economic prospects, on Tuesday traders appeared to calm down.

1. International stock markets stabilized with bargain hunting buyers balancing the sellers, and Asian markets opened Wednesday with respectable moves up.

2. Forex traders favored higher yielding, riskier currencies at the expense of the safer USD and JPY, showing a return of risk appetite

3. Commodities rose back to recent support levels, apparently due to a combination of a weakening dollar and less fear.

Given the continuing lack of news that suggests employment, earnings, GDP, or any other significant economic measure is likely to improve within the coming year as much as stock prices have already have increased, it remains to be seen world markets can continue to stabilize and improve.

Currencies
The USD and JPY were generally down against the other majors, and the commodity-driven CAD and AUD benefited from both the USD drop and rise in commodities.

World Stock Indexes

American and European markets held steady Tuesday, slightly up, down, or, like the S&P, unchanged. Thus the S&P daily candlestick chart flashed another Doji Star (cross shaped candlestick) that indicates indecision as prices move around and end unchanged. Dojis near the top or bottom of a trend often suggest a coming change in direction, which is worrisome given world stocks' advance since March in the absence of supporting fundamental data.
Indeed, since the start of June, each doji on the S&P daily candlestick chart has been followed by a decline within 2 trading days.

Looming Bank Q2 Results
As we've been noting repeatedly, with plenty of potentially bad news coming about the health of the financial sector, including second quarter earnings reports within a month (and rumors sooner still) traders and investors need to be on guard. News from the financial sector sparked both the current multi-year economic crisis and the current multi-month rally. It matters. A lot. Already the blogosphere is full of speculation and articles like:

• Three TARP Banks Already Classified as Deadbeats? Uh-Oh
• Big Banks in Trouble: Huge Mortgage Write-Downs Inevitable

Commodities
Declines in both pessimism and the USD helped Crude and Gold get back over recent support levels of around $68 and $923 respectively. Further short term moves will depend on news

Breaking News to Know

The OECD Raises Economic Outlook, Contradicting the World Bank: The Organization for Economic Cooperation and Development raised its forecast for the economy of its 30 member nations for the first time in two years as the U.S. slump shows signs of easing.

The improved outlook conflicts with that of the World Bank, which this week said the global recession will be deeper than it predicted three months ago, and may have been a primary reason for Monday's sell-off in stocks, commodities, and commodity based currencies worldwide. Could this announcement be the needed news to support for a further bounce up?

In anticipating a weak recovery staggered across different economies, the OECD signaled that the Federal Reserve and Bank of Japan should not raise interest rates before 2011 and recommended the European Central Bank cut its benchmark further.

The U.S. economy was largely responsible for the OECD’s prediction that the global recession will reach its bottom in the second half of this year. It believed that the U.S. economy will shrink 2.8 percent this year, and then grow 0.9 percent next year. The organization had previously forecast that U.S. growth would decline 4 percent in 2009 and see zero growth in 2010.

The OECD also raised its forecasted growth for China to 7.7% from the 6.3% predicted in March. (Bloomberg)

Coming News

The U.S. Federal Reserve began a two-day meeting on Tuesday at which it is expected to dampen expectations for interest rate hikes this year, while holding steady on its plans for asset purchases.

Disclosure

the author may have positions in the above instruments

FEAR RETURNS TO WORLD FOREX, COMMODITY, STOCK MARKETS & TRADER OPPORTUNITIES

2009-06-23T04:30:00.000-07:00

A pre US Market Opening Preview from the World

(As of approximately 12:30 GMT, 7:00am EST)

Introduction

On Monday, before the U.S. markets opened in the U.S. we warned that while stocks had recently remained range bound, there were worrisome signs of more downside.

We saw the above daily S&P chart. The "Doji Star" (cross-shape) candlestick of June 19 is marked by the white hand. Near term support of around 877 was shown by the horizontal green line.

"However [on Friday June 19] the S&P ominously printed another disturbing Doji Star (cross shaped candlestick). These suggest indecision and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 just as a technical test of this support level wouldn't shock anyone. News on economic fundamentals like unemployment, housing, spending, and earnings will most likely determine if that support, if hit, holds steady or collapses for deeper support tests."

Thus while many say that Monday's pessimistic World Bank forecast, that cut 2009 growth forecasts for most economies, was the main cause of the world-wide retreat in stocks, at most it was just a catalyst, with the above noted downward pressures just waiting for something like this to release them.

The Trading Opportunity

For all the below instruments, the new pessimism has created opportunities to open trades around new tests of support and resistance that in most cases have not been reached for 6 weeks. This allows traders to place stop loss orders near these levels to keep risk low compared to the potential gain if prices bounce back towards the chosen target exit price.

Currencies

Significantly, the new gloom established that not just the JPY, but even the recently maligned USD, are still perceived as safe havens and tend to rise against other majors when fear and risk aversion rule. Given the dollar's recent troubles, some had questioned whether this was still the case. We have our answer. The USD is still seen as a safe haven and is still likely to rise when stocks drop. Given the recent decline of the USD against most other currencies due to the recent rapid expansion of USD supply and debt, this is a welcome source of support

Similarly, the CAD and AUD retreated with commodity prices and fears of more to come.

The good news for FX traders is that a variety of currency pairs involving the USD, JPY, CAD, and AUD are testing levels of support and resistance, providing traders with chances to open position near these levels with nearby stop loss orders to keep risk down.

World Stock Markets

As noted in the above introduction, there were already thick fumes of uncertainty in the world stock markets. The World Bank announcement was the spark that ignited them.

As of this writing, Asian stocks again closed down for June 23rd, Europe has opened mixed, and struggles to stabilize.

The big trading opportunity for stock index traders is that support levels not tested since mid-May are now being tested or approached. As noted above, opening trades near these levels allows traders to place relatively close stop losses to minimize risk compared to the potential gain if the index moves as hoped.

Bank Earnings Loomng Ahead

The biggest near term threat to the possible recovery? Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks, and the recent rally began with surprise reports of bank profits. Earnings announcements are less than a month away. Rumors and "whisper numbers" will come sooner, especially if positive, since that could steady or even lift world stocks (and allow banks to sell more stock to help recapitalize, just like Bank of America and others did over the past months).

Unemployment is already close 10%, well beyond the stress tests' worst case 8.9%. That means more residential foreclosures, lower consumer spending, more commercial foreclosures, etc. The banks will need all the cash they can get.

Commodities

Given the above pessimism on the recovery and strengthening of the USD, commodities too are testing multi-week support. Crude and broke recent support of $68 and has fallen below $67, while Gold fell past $923 to settle around $918.

As above, traders may have opportunities to enter trades near these levels with relatively tight stop losses to keep risk down in what could be a volatile time for commodities.

Economic Calendar

Breaking News to Know:
CHF Swiss Trade Balance of 2.01B beats forecasted 1.86B

Coming News to Watch

3:00pm GMT USD Existing Home Sales

Conclusion & Disclosure

The author may have positions in the above instruments. To understand financial markets you need a grasp of what's happening in all of them. For income stocks visit:
http://highdividendstocksguide.blogspot.com/

For daily and weekly reviews of what's happened in world Forex, Commodities, and Stock Indices, visit http://worldmarketsguide.blogspot.com/

WORLD MARKETS BRIEF: CURRENCIES, COMMODITIES, & STOCK INDICES IN TRADING RANGES

2009-06-22T12:05:00.001-07:00

Currencies, Commodities, and Stocks Continue in Horizontal Range Trading Mode. Entering & Exiting Trades at Reliable Support and Resistance Appears to Be the Key for Now

1. Currencies

Potential low risk trading opportunities continue to be common, as major currency pairs continue to trade in clear ranges, mostly in flat, horizontal channels. The chart below illustrates the EUR/GBP trade we discussed on Friday. Note how the EUR/GBP moved up of over 1% up within 90 minutes, then down again over 1% over the next 8 hours. A reasonable 30-pip stop loss outside these support and resistance levels ( or trailing stop loss) would have limited their risk to about 0.33%, giving them a conservative 1:3 risk/reward ratio.

Here's the 1 Hour EUR/GBP Chart

That's why range trading is so great for low risk trading. If there is any major breach of these clear price tunnels or channels, traders can get out with only a small loss. However, if they can catch the full move within the trading range, they can make gains many times what they risked.

Traders who caught either of those moves using just $5000 at 200:1 leverage would have controlled $1million worth of currency and made about $10,000, 200% profit, just by identifying and exploiting the rather clear support and resistance levels. Alert traders who caught both moves could have made $20,000 within under 12 hours!

Note that there was never any mention of complex technical analysis or expensive computerized trading programs. Traders could make 200% profits just by this kind simple buy-low-sell-high (or the opposite) range-bound trading.

In sum, low risk and simple. That's how even new traders can trade profitably. Even if they lose on over half their trades, as long as the losses are small compared to the gains on the winning trades, they can still be profitable.

The EUR/GBP was just one example of many such simple low risk trading opportunities. Look at the range or channel alert traders could have noticed while watching the USD/JPY on June 16-17.

USD/JPY 1 hour chart.

Note how the USD/JPY chart June 16-17 showed resistance around 97.00, and strong support around 95.60 Traders who caught just most of the move between June 18-19 could again have made over 1% within a day. As above, a $5000 position at 200:1 leverage would bring around $10,000, a 200% profit, in less than a day. Using a reasonable 10 pip trailing stop loss and sell stop placed just beyond these ranges would have kept risk to about 10% of the potential gain from a move across the trading range.

Alert traders who caught the ride down June 19-20 had just as much fun and profit. Those catching both had a very

Thus even beginners could find opportunities to take positions near likely resistance or support levels. Traders can then limit risk by placing stop losses just beyond these levels. Thus if the expected short term low price or high price is broken, traders are automatically closed out with only small losses. If the levels hold, traders may potentially place sell orders near the upper range of recent prices and capture gains far larger than their potential losses.

Note: If stock indices continue to slide, this could support the USD and Yen in the short term as risk averse traders seek these as safe havens.

2. World Stock Markets

Stocks too stayed in tight trading ranges. On Thursday Asian and European stocks held support and made respectable gains. Wall Street built on these gains, boosted by better than expected manufacturing and inflation data. On Friday Asian stocks followed through with further gains, so did European indices. U.S. indexes were range-bound and ended mixed. The Nasdaq 100 and Russell 2000 were slightly up.

A. Doji Star Omen?

However the S&P ominously printed another disturbing Doji Star (cross shaped candlestick). These shapes suggest indecision (makes sense, up, down, then no net change) and often a change in the direction of the trend. Thus at the top of rally, they can foreshadow a coming reversal.

S&P 500 Daily Chart: Note Doji Star (cross shaped candlesticks) June 10-11, and the 3-day drop that followed. Does the June 19^th Doji Star foreshadow the next move down?

For example, if you look at a daily candlestick chart of the S&P, note the double dojis on June 10-11, and the three day drop that followed. Given that stocks have risen 20-30% world-wide since March, and that the recovery has not suggested similar growth in the coming year, the markets are vulnerable to a bigger pullback than we've seen thus far. Looking at recent support on the S&P, another 30 points down to around 877 wouldn't shock anyone. It could also drag overseas markets down as well, unless local conditions prove more optimistic.

B. The Vultures Gathering for Bank Earnings Announcements?

Forget Godot, we’re waiting for Q2 bank earnings announcements. Potentially disappointing results could be THE biggest near term threat to the possible recovery.

Note that Second Quarter Bank earnings will be coming out in less than a month. The current crisis began with very bad news from the banks. The current rally began with hopeful news from them. Decisively positive or negative news from the financial sector, both U.S. and international, could be the next really big news that moves the markets. Advanced leaks or rumors from unnamed sources could well provide earlier surprises that stir the pot in the coming weeks.

Positive news will very likely be leaked early, as banks and Washington both want to keep equity markets positive, even if it’s just long enough for the banks to sell more stock that helps them recapitalize.

Be on guard.

3. Commodities

ATTENTION ALL RANGE TRADERS! Crude oil has dropped to test its $68-$72 range. The same goes for Gold, currently at 925.3, its recent range being $925-$940. Will support hold? Will it break down? Whatever your theory, you've got a chance to try a trade and find out quickly with small loss if you’re wrong. If you're right, enjoy riding the bounce!

Crude is likely to remain in its range until there is further clarity on the supply/demand situation. Rising economies or declining inventories could boost it back to around $72 in the short term. The opposite news would indeed test the $68 support level.

Gold awaits news on whether inflation is coming soon or will remain dormant for a while. Most commentators suspect the massive increase in money supply across all major currency groups will bring inflation at some point. The debate now is whether world economic weakness will continue and perhaps bring deflationary pressures, which in turn would pressure gold prices.

Of course, negative economic or stock news could cause commodity prices to shatter these support levels.

4. Economic Calendar

German Business Ifo Business Climate survey came in at 85.9, beating a forecasted 85.1. The news had no significant effect, the Euro was mostly dropping before and after the news.

Breaking News to Know

U.S. Treasury Says The $134 Billion of Treasury Bonds were Counterfeit. Two Japanese men caught in Italy trying to cross into Switzerland with what appeared to be $134 Billion in U.S bonds in fact held nothing buy fakes according to the US Treasury Department.

Coming News to Watch

Tuesday: USD Existing Home Sales

5. Conclusion, Disclosure & More Info

Disclosure: I have positions in most of the above mentioned investments.

All major financial markets influence each other. Keep up with all world markets in just minutes. Visit http://worldmarketsguide.blogspot.com for updates on Forex, Commodities, and international stock indices.

High Dividend Stocks Guide

Why Oil Is Ready to Break Higher Towards $100 Per Barrel

GLOBAL MARKETS OUTLOOK FULL VERSION 11/16-20: Ominous Double Tops on S&P 500, EUR/USD

GLOBAL MARKETS OUTLOOK 11/16-20: Ominous Double Tops on S&P 500, EUR/USD

GLOBAL OUTLOOK Cheat Sheet 11/04: Stocks Rally, Gold, Oil Soar

GLOBAL OUTLOOK 11/04: Stocks Rally, Gold Soars on India CB Purchase

GLOBAL OUTLOOK CHEAT SHEET 11/02: TIRED RALLY TO HOLD OR PULL BACK? PACKED NEWS WEEK WILL DECIDE

GLOBAL OUTLOOK 11/02: TIRED RALLY TO HOLD GAINS OR PULL BACK? PACKED NEWS WEEK WILL DECIDE

Global Markets Outlook Nov 2-6: Pullback or Reversal? This Week Decides

Global Markets Outlook Nov 2-6: Short Version--Pullback? Reversal? This Week Decides

Stocks vs Currencies: Which Moves Which? Must Know Basics

Opposite Market Reaction to Similar News Implies Rally Exhausted

USD SHORT TERM UP, LONG TERM DOWN WITH BOUNCES & WHY

GLOBAL OUTLOOK 10/29 Full Version: Markets RETREAT, Will GDP Save Them?

GLOBAL OUTLOOK 10/28 CHEAT SHEET:MARKETS RETREAT AGAIN, AWAIT US GDP

GLOBAL OUTLOOK 10/28 Cheat Sheet -Why this Correction Could Become a Collapse

GLOBAL OUTLOOK 10/28 + Why this Correction Could Become a Collapse

Why Gold’s Sudden Move? The Greatest Confidence Game Unraveling?

Chronicle of a Mystery: September’s Unexplained Events

Tuesday, September 1st

Wednesday, September 2nd

So What’s the Meaning of Gold’s Behavior?

Background: Why Money Supplies Ballooned

The Biggest Too-Big-To-Fail: America and the USD

A No-Confidence Vote in Currencies?

So, What Do You Do?

Today’s Best Risk/Reward Income Investments Part 2: Canadian Energy Infrastructure Stocks

The Problem: Conflicted by Fear and Greed

A Solution: Selected Canadian Energy Infrastructure Stocks for Steady, High Returns

Reward/Risk Overview

Why Buy These Canadian Energy Infrastructure Stocks?

Why NOT to Buy Them

CANADIAN ENERGY INFRASTRUCTURE STOCKS – Our Top Recommendations for Income and Safety

ALTAGAS INCOME TRUST

KEYERA FACILITIES INCOME FUND

PEMBINA PIPELINE INCOME FUND

Conclusion

Today’s Best Risk/Reward Income Investments Part 1: Canadian Power Stocks

The Problem: Conflicted by Fear and Greed

A Solution: Selected Canadian Electric Power Stocks for Steady, High Returns

Why Buy These Canadian Power Stocks?

Why NOT to Buy Them

Conclusion

Safest High Yield Stocks to Buy On the Next Dip

Why Stocks are Overvalued

Why CDPYF Should Be on Your Shopping List

Solid Performance Under Adverse Conditions

Strategic Focus on Quality Properties and Regional Diversification

Financial Strength to Exploit Best Future Growth Opportunities

Why Not

Not Immune from Overall Sector Weakness

Very Thin Trading Volume

Conclusion: Rewards Outweigh Risks, But Wait for Market Pullback

Weekly Preview: Key Clues from Global Markets

Weekly Preview: Key Clues from Global Markets-Part II

Weekly Preview: Key Clues from Global Forex, Commodities, Stock Indexes --Part I

Background

Is July the Turning Point? Or Just Another Move Down Within Price Channels?

Context Is Everything

Unemployment is Key for the US

Big Themes For the Coming Week

The S&P remains the key market to watch

Ramifications

US Dollar: Declining Risk Appetite Favors It Against Riskier Currencies, Now Awaiting Next Big News, Probably from Q2 Earnings, Especially Financial Sector Earnings Coming This Week

Summary & Potential Market Movers for the USD

USD Has Been Moving on Fear, Not Fundamentals, Awaits the Next Big News

Euro Likely to Remain in Tight Trading Range Barring Breakdown in Stocks

Summary

Potential Market Movers for the EUR

WorldMarketsGuide Preview: Stocks Officially Downtrend, Forex, Commodities Follow--How Long?

Weekly Preview: Key Clues from Global Forex, Commodities, Stock Indexes

Background

Most Markets (Risk Assets) Rise Through May, Consolidate in June

Is July the Turning Point? Or Just Another Move Down Within Price Channels?

Big Themes For the Coming Week

US Dollar: Still in Horizontal Channel, But Risk Appetite Will Decide

Summary

USD Rises on Fear, Not Fundamentals

Euro Volatility Likely Ahead of Central Bank Interest Rate Decision

Summary

Tuesday, September 1^st

Wednesday, September 2^nd